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TAYLOR 






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SITY OF 
T LOS ANGELES 




SOME 
CHAPTERS ON MONEY 



PRINTED FOR THE USE OF STUDENTS 
IN THE UNIVERSITY OF MICHIGAN 



BY 

F. M. TAYLOR. Ph.D. 



ANN ARBOR, 

(;korge wahr 
1906 



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Copyright, 1906, 
F. M. Taylor 



The Ann Arbor Press, Printers 



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PREFACE^ 



This book is printed for the use of students in the L'ni- 

versity of Michigan, the edition being hniited to three hun- 

^ dred copies. It does not attempt to cover the subject com- 

> pletely, though not many important topics are omitted. The 

unchdy elementary treatment noticeable in some parts arises 

from the fact that a considerable part of the matter is taken 

from the manuscript of a projected text book on Money 

\ and IJanking intended for less advanced students. 



J 



389166 



/ 




CONTENTS. 

nti'oduclion ....... 

CHAPTER T. 
The Nature ami Functions of Money . . . ii 

y/ CHAPTER H. 

The Typical Monetary System .... 34" 

CHAPTER HI. 

Monetary I'rinciples — The Xatural Laws of Circu- 
lation ....... 80 

CHAPTER l\'. 

The Geographical ^Movement and Distribution of 

Money . . . . . . • in 



7)/ 






CHAPTER \ . 
,^ The Money Standard — [Principles Governing- 

CHA^'TER \'I. 

/The Natural Laws Regulating Changes in the \'alue 
of ^loney . . . . ... . 1/5 

CHAPTER \TL 

The Requisites of a Good Monetary Standard . 239 

CHAPTER \in. 
The Proper Regulation of the Rank Note Circulation 276 



,. ^ 



INTRODUCTION. 

The starting point of the study of money is to he found 
in certain very familiar facts of everyday hfe. First , we 
are creatures having many wants dependent for their sat- 
isfaction on our possession of certain material objects or 
conditions which are called by the economist commodities 
and services or simply economic goods. Secondl y, our 
being possessed of these goods is not usually a matter of 
course but in nearly every case, involves supplying our- 
selves through the expenditure of labor or some other 
form of sacrifice. Thirdly , the method of supplying our- 
selves which we have found most successful is not for each 
to produce for himself all kinds of goods but rather to pro- 
duce only some one kind and use it to get the rest through 
exchange from his neighbors. Now, it is at this point — this 
exchanging of our products for those of our neighbors — 
that money comes into the case. Doubtless the beginnings 
of exchange have always taken the form of barter, i. e. a 
direct exchanging of goods for goods. But it would al- 
ways very soon appear that this method of exchange in- 
volves very serious drawbacks. Let us take a moment to 
make this plain. 

If we suppose, for example, that one man has produced 
a surplus of wood which he wishes to exchange for a 
watch, it is evident that to carry out the plan it will be nec- 
essary to find someone who has a watch to dispose of and 
at the same time needs wood, and who, further, needs wood 
in an amount exactly corresponding to the value of the 



8 CHAPTEKS ON MONEY 

watch. l*>ut to find such a coincidence may not he the 
easiest things in the world, may, indeed, prove very difficult. 
It would not be hard to find men who want wood ; but they 
may have no watches to dispose of. So it would be easy 
to find men who have watches to sell ; but they may not 
want wood ; or, if any one of them does want wood, he may 
want onlv half as much as would be needed to pay for a 
watch. As civilization advances these obstacles to barter 
become more and more serious. For, with the advance of 
civilization, occupations, tastes, and incomes become more 
diverse, and a larger and larger number of workers are de- 
voted to producing things for which only a few of their 
fellows have any use whatever. For such persons — that 
is, for most of us — exchanging their own goods directly 
for all the diflferent kinds of goods which they want would 
be quite out of the question. Fancy a manufacturer of steel 
rails, or mowing machines, or microscopes, or surgical in- 
struments going around trying to trade his wares for sugar 
or flour or a suit of clothes ! In any highly developed so- 
ciety a general use of barter is not simply inconvenient ; it 
is ridiculously impossible. 

But I hardly need to say that no highly developed so- 
ciety, in fact no society, tries to run its exchange on the 
barter plan. With the very beginnings of trade we find 
men making use of some medium of exchange — some go- 
between which each one seeks to get in exchange for his 
goods and, having gotten, uses to buy other goods. The 
thing specially set apart for this purpose we call money. 
With its assistance the troubles of the man who has wood 
to dispose of and wants a watch quickly disappear. He 
simply sells his wood to the different persons who want 



INTRODUCTION 9 

wood: and tlicn. takini; to the JcwcKt tlic hkiiicv thus oh- 
tained. buys a watch. 

Thus we find existin<i- in the business world an institu- 
tion called money which, as we can all see. is a very impor- 
tant factor in our lives. We are, doubtless, quite ready to 
believt' that with respect to the nature, the workin^^, and 
the management of this institution many interesting and 
important facts manifest themselves. It is to the study of 
these facts that the following chapters are devoted. 

A word now as to the plan of treatment. While there 
is no formal division of the matter into parts, the chapters 
naturally fall into three groups. ( i ) the first and second, 
occupied with a dcscrif^tivc account of money. (2) the 
third to the sixth inclusive, devoted to the principles or 
natural laws which regulate monetary phenomena, and (3) 
the seventh and eighth, given to certain problems connected 
with the con.scious regulation and management of a mone- 
tary system. 



\l 



CHAPTER I. 
THE NATURE AND FUNCTIONS OF MONEY. 

I. MONEY DKFlNIvD. 

The essential nature of money has already been brought 
out, though of course only in general terms, in introducing 
our subject. That is, money is in essence something gen- 
erally and habitually employed as the medium of exchange, 
the go-between which men obtain with their products and, 
having obtained, use to obtain other products. A very 
slight elaboration of this statement will furnish us with a . 
fairly adequate definition of money as follows : Money is* ^ 
soiiicthi'iig which is specially designed for, and devoted 
to, scrinng as a medium of exchange, although it is also put 
to other uses for zvhich it is specially fitted either because of 
its being a recognized medium of exchange or because of 
the nature of the substance of zi'hich it is made. 

Commenting on this definition, we' note first that it 
makes money primarily and essentially a medium of ex- 
change. If money is put to other uses, these are derivative, 
incidental, growing out of its nature as a medium of ex- 
change or some peculiarity in its substance. It follows from 
this that money, as money, is wanted, not for its own sake, 
but only for what it will buy. Money may be made of 
something which is much desired for other uses, and, be- 
cause it can be put to these uses, we may have a desire for 
it as a substance rather than a desire for it as money. All 
this is substantially true of gold coin in the United States, 
England, and many other countries. But money as money 
is desired only because it will buy other things. If it does 
this, we ask no more of it. It has played its part. 

To make an application of this special point, it does not 
seem proper to include in the definition or general descrip- 



12 CHAPTERS ON MOXEV 

turn of money, as some writers have done, the idea that • 
it is a commodity of the ordinary sort, a use-commodity, 
meaninc^ bv this a commodity which can be put to the sat- 
isfying^ of our wants in its own proper person or. at least, 
in some way more direct than throug^h exchangee for other 
goods. It is conceivable that experience would show that 
nothing could serve as money in the fullest sense — the 
standard or principal money of a country — unless it was 
such a use-commodit\- ;* but this fact would not belong to a 
definition of money but rather to an account of the princi- 
ples which regulate the currency of moneys. It is of the 
very essence of money that people seek it. not to use it di- 
rectly, but to get other things which they will use directly. 
Again it is to be remarked that according to our defi- 
nition ordinary commodities occasionally employed as media 
of exchange are not therefore money. Communities in- 
sufficiently supplied with money proper often employ as 
substitutes one or more kinds of goods which are common 
among the members of the community and for which there 
is always a fairly good market. Thus tobacco, cattle, corn, 
powder, bullets, skins, all served this purpose in the Amer- 
ican Colonies. But none of these can quite properly be 
called money. Money is something spe d ally dev oted to 
this business of making exchanges. I cafT use a pocket knife 
to hold down loose papers: but this does not make it a 
paper weight. 

Finally, money is something si^xially dcsi'^ncd to serve 
as the medium of exchange, soiuething manufactured for 
the purpose. If a community contents itself with gold dust 
weighed out. or measured out. at each exchange, we can 
not say that gold dust constitutes the money of that com- 
munity. We must rather say that the community in ques- 
tion has not yet come to use a true money. That is, only 
gold coin is money, not gold bullion. This statement, 



Experience surely does not show anything of the sort. 



NATURE AND FUNCTIONS I3 

however, must be so far qualified as to admit that a con- 
siderable portion of the gold bullion actually present at 
any moment in a country having the gold standard is to 
be thought of as in effect a part of the country's stock of 
standard money. The explanation of this is to be found 
in the fact that for making international payments gold 
in the form of bars is preferred to coin ; and, therefore, the 
institutions which keep the funds from which such pay- 
ments are made naturally keep at least a portion of those 
funds in the form of gold bars. 

The preceding paragraphs have brought out the charac- 
teristics essential to money. We must next remark on the 
inclusion of the term, the dift'erent things to which it can 
properly be applied. If the student is familiar with the 
system of the United States, the word money will at once 
suggest to him various coins of gold, silver, nickel, or cop- 
per, and various "bills" such as greenbacks, bank notes, or 
silver certificates. He will not usually include under monev 
checks or drafts, though he probably knows that these act 
in some respects as money. 

Now. in interpreting thus broadly the word money, 
the student will represent the majority of the public 
and will not be falling into any serious error from the sci- 
entific point of view. Presently, indeed, it will be necessarv 
to explain to him that of the various things in our svstem 
which we commonlv call monev one onix — sfold coin — is in 
the fulk-sl sense ni(ine_\'. real money, that the rest are more 
accuratelx described as in some degree reprcsentatii'c mon- 
eys, credit moneys. But very likely he has already recog- 
nized this fact ; and anyhow there are man}- connections 
in which he can safely ignore this distinction and treat as es- 
sentially the same — as really money — the things named above. 
In fact almost every writer on the subject does this, how- 
ever much he may have emphasized the point that onlv such 
monev as our gold coin is real monev. He mav indeed 



14 CHAPTERS ON MONEY 

take pains to prefix some qualifying- adjective when apply- 
ing the term money to the inferior or representative moneys. 
Thus he may speak of subsidiary money, token money, 
paper money, government money, and so on. But in doing 
this he seems to have recognized these as special varieties 
under the species money. In this book, therefore, the word 
money when unqualified will usually have the same exten- 
sion that is given it in popular usage ; that is, it will include 
all the things which really circulate — pass from hand to 
hand as media of exchange without endorsement — al- 
though standard money will be recognized as the only one 
which is money in the fullest sense. 

IT. MONEY AS A :\rEDIUM OF EXCHANGE. 

The general character of the primary function of money 
— serving as a medium of exchange — has already been 
brought out in defining money. But it is desirable to go 
into the matter a little more fully, to make the analysis of 
the function more complete. An illustration which shows 
the precise nature of this function very clearly is furnished 
by the case of the farmer who comes to town with a load 
of wood, sells it for five dollars, and then spends the money 
buving groceries, drv goods, etc. What, now, are the char- 
acteristic features of this method of procedure? First, it 
is plain that the single transaction of barter has given place 
to two transactions, a sale of one goods and a purchase of 
another. This, however, does not quite exhaust the matter. 

Between the two transactions thus substituted for 
the one transaction, there is necessarily an intermediate 
stage, an interval of waiting long or short, which gives the 
farmer who has sold his wood for money a chance to get 
himself into relation with the men from whom he is going 
to buy groceries and dry goods. Further, if money ex- 
change is going to be a really great improvement over bar- 
ter, this interval of waiting must be capable of indefinite 



NATURE AND FUNCTIONS 1 5 

extension ; for the farmer will not necessarily wish to spend 
the whole proceeds of his wood for groceries and dry goods 
or an}thing else on the same day that he sells that wood. 
It may easily be for his interest to separate sale and pur- 
chase by weeks or even months. For example, he will be 
selling wood every day during the good sleighing of mid- 
winter ; but he will want to do the buying part of the 
operation all along till summer crops begin to bring in, 
something-. It is thus evident that mon ey excha nge really i 
breaks up barter into three p arts ; viz. (i) .selli ng goods f or] 
money . (2) keejpJngjth^ moiiey till other goods are needed , 
and (3) using t he mone y tqjjuy other goods. It is further' 
evident that in these three stages, as looked at from the 
standpoint of the man who starts out with goods to sell, 
money plays three different parts. In the first, its role is 
that of a thing which can be obtained with any goods what- 
soever. In the third, its part is that of a thing which can 
obtain any goods whatsoever. In the second, its business 
is to keep — store — this power to obtain other goods. 

But just here we need to be a little careful. In trying 
to realize clearly that acting as a medium of exchange in- 
volves three stages, we must not fall into the mistake of 
supposing that money is to be thought of as a medium of 
exchange only when, and in so far as, it carries an ex- 
change transaction completely through its three stages. 
Doubtless money has not entirely performed its part as a 
medium of exchange, till the farmer who has sold his wood 
for money has also used the money to buy shoes or some- 
thing else. Still, it is performing that part in each stage of 
the operation. It is serving as a medium of exchange, pro- 
vided it is doing for anybody any one of the three things 
which are essential to a complete exchange operation. That 
is. money is serving as a medium of exchange either (i) 
when a man is getting it in exchange for goods, or (2) 
when a man is keeping it on hand with the intention of 
using it at the proper time in the purchase of goods, or (3) 



1 6 CHAPTERS ON MONEY 

when he is actually using it to purchase goods. Or, to 
change the form of expression, money is a medium of ex- 
change so long as it is being sought after, or being kept, or 
being used, solely to buy goods, either for its owner or for 
someone to whom he transfers it as a gift or as a means of 
settling an obligation. When no longer employed in one 
of these wars it has ceased to be a medium of exchanare, 
and has ceased to be monev. 



III. MONEY AS A MEASURE OF VALUE. 

We have considered the primary, essential, function of 
money — serving as the official medium of exchange. We 
must next comment briefly on a second use wdiich at times 
certainly seems to be an independent function, though one 
which is secondary and which does not at all interfere with 
the employment of money as a medium of exchange. This 
second function is to serve as a coininon ineQsjjre'^ of value; 
i. e. an instrument with which we ascertain, or in which we 
estimate, the quantities of value possessed by different ob- 
jects, and the denominations of which we employ in stat- 
ing those quantities. Of course we are all familiar with 
the process of mensuration in other cases. We are aware 
that when any object possesses some property which can 
vary in degree or amount, we are able to get a quantitative 
expression of the degree or amount of that property in the 
given object by comparing it with the degree or amount of 
that property possessed by some other object which we 
choose to employ as a criterion or measure. Thus, suppose 
I wish to get a new pane of glass to fit a particular sash 
and so need to measure the length of each side of the sash 
in order to buy a i)ane of the correct size. This I do easily 



* Some years ago an eminent American economist, General 
Walker, tried hard to replace the phrase "common measure of val- 
ue'' with the phrase "common denominator of value." Economists 
generally have rightly refused to follow his lead. See problems 21 
and 22 at the close of the chapter. 



NATURE AND FUNCTIONS l^ 

enough by comparing the sides of the sash with a strip of 
wood known as a rule, marked off into feet, inches, and 
fractions of inches, and seeing how many of these feet and 
inches are needed to make up the full length of the side 
measured. 

The measuring of values with money is in no essential 
respect different. Exchange value, i. e. the power of any 
object to command in exchange some other object, is a 
propertv* of objects which varies in quantity ; and so can 
be measured. Further, in order to measure it in the case of 
any particular object we must compare it with the same 
power as existing in some other object. Thus, if I am called 
on to estimate the value of an old-fashioned sofa belonging 
to an estate and conclude that it is about $60, I have com- 
pared my conception of the value of the sofa with the value 
of one dollar and reached the conclusion that the former 
is 60 times the latter. 



* Not a few writers have affirmed that value is a ratio rather 
than a property. There is an easy and decisive answer. A ratio 
can never be affirmed of a single object. We can not speak 
of the ratio of 20 and the ratio of i ; though we can speak of the 
ratio between 20 and i. Twenty and one give us not two ratios 
but only one. Yet value is constantly affirmed of single objects and 
that by the very writers who call vahie a ratio. Thus Jevons, who 
is most responsible for the doctrine in question, after denouncing 
the usual theory, says : "The more correct and safe expression is, 
that ihc value of the ton of iron is equal to the value of the ounce 
of gold, or that their values are as one to one." Here we have two 
values with only two things and yet value, the writer claims, is 
only a ratio. Obviously value is a property of each of the goods, 
iron and gold, and a ratio comes in only when we try to express 
the relation of these two vakies. The mistake arises from suppos- 
ing that to call anything a property of an object is to affirm it 
inherent in that object, inseparable from it, and so not relative to, 
or conditional on, anything else. Perhaps there are such properties. 
But many properties, certainly, are quite different. A soft iron bar 
has the property of magnetism because, and while, a current of 
electricity is passing through the wire coiled about it. So material 
objects possess the property of value because, and zvhile, they are 
in certain relations, qualitative and quantitative, to human wants. 



l8 CHAPTERS ON MONEY 

Now there is just a little doubt with respect to the pro- 
priety of setting up this measuring of value as an indepen- 
dent function of money. For in a sense acting as a common 
measure of values is merely a necessary incident to acting 
as a medium of exchange. Whenever, indeed, any object^ 
is exchanged for any other object, the exchange value of 
each is thereby measured. Thus if i pound of butter is 
exchanged for 3 pounds of sugar, then the value of i 
pound of butter is. for the exchanging parties, measured 
as 3 pounds of sugar, while the value of i pound of sugar 
is measured as 1/3 of a pound of butter. So, when, instead 
of directly exchanging the butter for the sugar, we first 
sell the butter for 21 cents and then use the money to buy 
3 pounds of sugar, although primarily using money as a 
medium of exchange, we have necessarily measured the 
value of I pound of butter as 21 cents, and the value of i 
pound of sugar as 7 cents. 

But, while there is some doubt whether one ought to 
treat measuring values as anything more than a necessary 
incident to acting as a medium of exchange, yet it is prob- 
ably best to resolve this doubt in the affirmative for the 
reason that in not a few cases money seems to be used as a 
measure ivhen it is not senniig as a medium of exchange. 
Particularly good, though not very common, illustrations 
of this sort are furnished by those direct barter transactions 
which still occur in rural districts. Suppose I am a farmer 
and winter is coming on when I shall have a little more leis- 
ure. I get it into my head that I will cut enough wood off 
a particular lot to buy me a cutter. How much will it take? 
Evidently I want to know the values of both wood and 
cutters as measured in a common unit, and then it will be 
easy to tell how many cords of wood will have the same 
value as a cutter. I therefore inquire how much the value 
of a cord of wood is when measured in money and find 
that it is five dollars. In the same way I learn that the 
value of the cutter as measured in money is thirty dollars. 



NATURE AND FUNCTIONS 1 9 

Of course, then, it will take the quotient of five into thirty, 
or six, cords of wood to huy the cutter. 

Cases just like this of the wood and the cutter are not 
very common ; but substantially the same needs come to us 
all very frequently. We need to estimate the exchange val- 
ue of our own goods, because it is their value which deter- 
mines what we shall have to buy with. We need to esti- 
mate the value of other peoples' goods ; because it is the 
value of those goods which determines how far our money 
will go. Further we need to estimate the values of things 
in order to judge their significance to us, — to answer the 
question whether or not they are really zvorth getting. Now 
this property — significance to us — is plainly something 
much deeper than exchange value and it is probable that 
we do not usually measure it directly by money. Our im- 
mediate measure of the significance of one thing is usually 
the significance of some other thing which we have formed 
a habit of setting up as our standard in the particular class 
of cases. Thus, to judge whether it will pay to go to the 
Thanksgiving football game, I may compare the satisfac- 
tion to be obtained from it with that to be obtained from 
two Haskell golf balls. If it is a new easy chair, which I 
am looking at, I may compare its significance with that of 
a writing desk for my study. And so in other cases. But 
plainly, as a prerequisite to making these comparisons and 
using them as a guide to economic conduct, I must know 
the relative exchange values of the two things compared. 
There is no advantage to be gained by settling whether 
the football game or the two golf balls are more significant 
to me. unless their exchange values are substantially equal. 
Thus, being ab le to measure exchange value makes us able 
to compare rea l, personal, values. 

From what has been said it will be evident that the use 
of money to serve as a measure of value does not involve 
the withdrawal of any particular pieces of money from other 
uses to perform this function. If we are merelv estimatino- 



20 CHAPTERS ON MONEY 

values in terms of money, we are using, not the actual 
money, but merely the idea of value associated in our minds 
with money. Even when actual measuring takes place, i. e. 
when an actual sale shows the actual value of a certain 
object, the money or its equivalent which does the measur- 
ing at the same time serves as the medium of exchange ; 
and so no special portion of the stock is withdrawn from 
its regular function to perform this special duty of meas- 
uring. The use of money as a measure of value, therefore, 
interferes in no degree with its employment in its essential 
office as a medium of exchange. 

IV. MONEY AS A STORER AND CARRIER Of VALUE. 

In studying money as a medium of exchange and as a 
measure of value, we have probably covered all the ser- 
vices performed by it which can with strict propriety be 
called separate functions. But there are two other ways in 
which money frequently serves us, which it is sometimes 
convenient, though not scientifically accurate, to treat as in- 
. dependent functions, and which are often so treated. These 
must now claim our attention. 

The first of these cjuasi-functions of money has its origin 
in two facts already touched upon ; viz. ( i ) that a necessary 
stage in the effecting of exchanges through money is the 
interval of waiting between the sale of goods for money 
and the use of the money to buy other goods and (2) that 
this stage can usually be indefinitely prolonged at the will 
of the owner of the money. As a result of these facts our 
freedom of choice as to the time when we shall utilize our 
wealth is indefinitely increased. The products of today are 
sold today ; but through the magic of money they satisfy 
the wants of next week or next month or next year. If the 
nature of a man's business causes his income to mass at one 
season, he does not, after all, have any trouble spreading its 
consumption over the whole year or even over many years. 



NATURfc) AND FUNCTIONS 21 

The fruit grower does not live in plenty from June till 
October and then starve the rest of the year. Of course 
he would not, even under a barter rei^^ime ; but he would 
have considerable difficulty avoiding that result. Under a 
svsteni of money exchange the matter gives him no trouble. 
He sells his fruits at the time when they are ready for the 
market ; while the buying of other goods with the proceeds 
he effects whenever he pleases. 

Now, it is hardly necessary to say that, in a case like 
the above, money is performing is regular function of 
mediating exchanges ; the only peculiarity being that the 
goods exchanged are goods belonging to different 
times. July goods are exchanged for February goods ; 
goods of 1902 for goods of 1903 ; and so on. But, 
while it is easy to interpret a case of this sort as 
one wherein money acts as a medium of exchange, it is 
possible to look at it in another way. The fruit grower's 
raspberries in their most desirable form would not keep 
till he wanted to buy some clothes in the winter. He must 
dispose of them in July or not at all. He may, therefore, 
think of himself as selling them for money, just because 
money being indefinitely durable and constant in value unll 
store the I'alue of his berries till he is ready to use it. Of 
course, he is using money as a medium of exchange, but 
with an eye to this one special advantage among the many 
which the use of a medium of exchange gives. 

Now this way of interpreting the matter, which per- 
haps seems rather forced as applied to the fruit raiser, has 
much more point in certain cases which can easily be 
imagined. Thus, it sometimes happens that people 
sell things which will keep indefinitely and which 
they really want and will later buy back with the 
very money received from their sale, simply be- 
cause they consider the money a safer form in which to 
keep their wealth during the interval. This is especially 
likely to happen in badly governed countries where prop- 



22 CHAPTERS ON MONEY 

erty is insecure. But it also happens in well-governed 
countries, if for any special cause temporary insecurity 
prevails. On the eve of a great war. bonds and stocks are 
likely to be treated in this way. So in the midst of a dis- 
as4:rous war even a civilized nation may be in such desperate 
straits that people anticipate a confiscation of certain kinds 
of property and hasten to turn them into money as being 
more easily concealed. In such extreme cases as these, it 
certainly seems legitimate to say that money acts as a storer 
of value. But even in the more ordinary cases, so long as 
the special object in the mind of the seller of goods is to 
get his wealth into a form which will keep, we may without 
serious impropriety describe the operation as a storing of 
value. Only we must not forget that money's storing value 
is not a work independent of its serving as a medium of ex- 
change, but is merely the artificial prolonging or emphasiz- 
ing of one of the three necessary stages in its mediating of 
V exchanges. 

Quite similar to the service of storing value is that of 
transporting or earrying 7'a!ue. It is of the nature of money 
exchange to enable us to separate the selling of our goods 
and the buying of other people's goods in time and place. 
How the separation in time makes money suitable to serve 
us in storing value has just been explained. An analogous 
advantage can be derived from the separation in place. The 
farmer may sell all his wheat in Ann Arbor ; but this does 
not hinder his spending the proceeds in Ypsilanti, or Saline, 
or Detroit, or any other place you please ; since the money 
which he gets for his wood will keep its value while he 
carries it from Ann Arbor to Ypsilanti, or Saline, or De- 
troit. It is thus a characteristic of money exchange that it 
enables us to efifect with the least possible trouble exchanges 
between goods located in dififerent places. Through the 
mediation of money Ann Arbor goods are traded for De- 
troit goods, or Saline goods, or Chicago goods, and so on. 



NATURE AND FUNCTIONS 23 

And this element is in a measure present in every 
exchange. No two wares will be found in absolutely the 
same place. The man w'ho buys the farmer's wood and the 
man who sells him shoes will be separated by a few feet 
anyhow, probably by many rods. 

But, it must now be added, while this element 
is present in all money exchange, it is in some cases the 
conspicuous element. It is that one of the various advan- 
tages to be derived from money exchange which the seller 
of goods is seeking to realize. Thus he may want to sell 
his commodity, simply because it is in the wrong place. He 
is a farmer in Michigan, intends to remain a farmer and 
likes the particular farm he has now ; but he is going to 
move to Oklahoma. If he could carry along the farm, he 
would not think of selling it. But farms can not be moved, 
and, therefore, he must sell this farm and buy another in 
Oklahoma. Of course this is at bottom merely a case of 
exchanging one farm for another through the assistance of 
money. But it is sometimes convenient to treat this use as 
an office of money different from its ordinary one as a 
second quasi-function, in which case we designate this quasi- 
function the carrying or transporting of 7'aluc. Under mod- 
ern conditions money is perhaps less often used for this 
purpose than its credit substitutes ; that is, written rights to 
claim money. 

V. SOME SPECIAI. USES OR DISPOSITIONS OF MONEY. 

We have now considered the primary function of money, 
to be a medium of exchange, its secondary function, to be 
measure of value, and two quasi-functions, which are inci- 
dental to its primary function. We must finally give a 
moment's attention to what I shall call certain special uses 
of money. These uses are not peculiar to money, but they 
acquire special significance in its case because of its unique 
characteristic as the universal form of wealth — t he pos - 
sessor of luiiversal buying power . 



24 chapte;rs on money 

In order to make clear the nature of these special uses, 
I will choose for illustration a use of money which might 
be treated as one of these special uses now under considera- 
tion, though it probably never is, I mean its use in making 
presents. We all have occasion to make gifts — to transfer 
to another person some object of value without exacting 
anything in return. Such a disposition we can make of all 
sorts of valued articles ; and we do not, on that account, 
look on this use of such articles as a new or special func- 
tion belonging to them. The fact that parents make pres- 
ents to their children of sleds, skates, tennis rackets, etc. 
does not cause us to say that serving as instruments for 
making presents is a special function of sleds, skates, or 
rackets, in addition to their natural functions in coasting, 
skating, or playing tennis. Giving away sleds or skates 
or rackets is simply a particular method of disposing of our 
property, — causing it to satisfy somebody else's wants rath- 
er than our own. 

The case of money, however, is somewhat different. 
Being the medium of exchange — the universal equivalent 
— it proves in many cases a very convenient means for mak- 
ing presents in general. The giver likes it ; because it saves 
the time and trouble he would spend deciding on a suitable 
object. The recipient likes it; because it leaves him free 
to choose for himself what the present shall be. We can 
conceive, therefore, that a farmer might come to town and 
sell his wood, in order to get five dollars just on purpose 
to distribute that five dollars in presents. And, in such a 
case, we might say that money acts as a gift medium. Now, 
as a matter of fact, we do not do so; we do not call the 
making of gifts a special function of money ; but we pur- 
sue such a policy in several analogous cases. 

Of these special uses that one which seems to me most 
deserving of mention is the serving as loaiijnedium, i. e. 
as the medium in which loans are made. It is doubtless 
well-known to the reader that under modern conditions a 



NATURE AND FUNCTIONS 25 

very large part of the business of a country is carried on 
with borrowed capital. A business man worth not more 
than, sav. twenty thousand dollars, will be controlling pro- 
ductive capital in the shape of engines, machines, raw ma- 
terial, and so on. worth thirty thousand or more. 
Now, this is no mere accident. Experience has shown con- 
clusively that productive efficiency is increased through a 
separation of functions which leaves the accumnkiting of 
capital largely to one class of persons and puts the employing 
of it in the hands of another class. But this division of 
labor means that there must be a traffic in capital between 
the accumulators and the users of it. Such a traffic might 
take either one or two forms. The capitalist might get 
together a stock of engines, machines, etc., and hire these 
out to the entrepreneur, as the responsible producer is called. 
Or the capitalist might get together a stock of money or 
bank credit and hire that out to the entrepreneur, leaving 
him to buy capital goods as he needed. The student will 
readily believe that the latter is the better way. It is in 
fact the chief, though not the only method, which is em- 
ployed to secure for one man the use of another man's 
capital. Now. when money or bank credit is used in this 
way, we say it is used as a loan medium; that is, money iSj^ 
insuch cases, the medium through which the borrowing 
and lending of capital is carried on. What the borrower 
really wants is, not money, but engines and machines. But 
he borrows money ; because, in getting money, he gets the 
power to get engines and machines. 

I have said that it is sometimes convenient to give this 
use of money or bank credit a special name — loan me- 
dium. I hardly need add that money is not performing 
here any really new function. Because the keeper of a 
skating rink hires out skates, we do not say that skates per- 
form in addition to their function in skating, the function 
of being hired out. No more can we say that it is a function, 
of money to be hired out. Further, it is quite possible to 



26 CHAPTEiiS ON MONEY 

interpret this use of money as really a case where it acts 
as a medium of exchange. Though the entrepreneur has 
no goods to sell for money with which to buy engines and 
machines, he has after all something which it is easy to sell 
for money ; viz. credit, or claims on himself to receive mon- 
ey. Having made out his promise to pay five thousand dol- 
lars one year from date, he can take this with proper secur- 
ities to the bank and sell it for money or bank credit; 
whereupon he can take the money or bank credit and buy 
therewith the engines and machines needed. Thus, when 
money is borrowed and lent it may be said to act as a me- 
dium of exchange between credit and goods. However, 
when it is convenient to speak of money as being used as 
a loan medium, we shall not hesitate to do so. 

Another special use of money, one which has received 
more general recognition than that of loan medium, is serv- 
ing as a means of,_^JiyjBCjiJ , a means for making one-sided 
transfers of value. Thus the government demands from 
us certain contributions of wealth covered by the term 
taxes, or, in the case of wrong doing, exacts from us cer- 
tain payments known as fines. Or we may have brought 
injury either accidentally or intentionally to our neighbors, 
and, therefore, are compelled to give compensation, to pay 
damages. Here we have several occasions for one-sided 
transfers of property. What more natural to choose for the 
purpose than money, the medium of exchange, the form of 
wealth which everybody is glad to get because it has power 
to buy every other form of wealth? Nothing, surely. It 
is, therefore, chosen; and thus comes to be called the Jcgal 
inemis of payincnt. 

It should be said, however, that in dignifying this 
use of money with a special name, we must be careful not 
to take our act too seriously. We must not suppose that 
this is a function of money in any such sense as is its act- 
ing as a medium of exchange or, indeed, that this is a use 
of money independent of, or inconsistent with, its being a 



NATURE AND FUNCTIONS 27 

medium of excliat\c^c. The government takes from me a 
tax payment of $35 in the medium of exchange, just because 
it is the medium of exchange, and so can be used to buy 
anything the government wants. If, instead of money, 
they had collected from me seven tons of soft coal to burn 
in the city furnaces, we should not have concluded that coal 
had given up its function of being fuel and taken on the 
new one of paying taxes. 

Another case wherein money is usually said to serve as 
a means of payment is when it is employed to settle claims 
created by the borrowing of money, i. e. by its use as a 
loan medium. This borrowing may be direct, as when I 
receive $100 from the bank in exchange for a promise to 
pay back $100 three months later, or indirect, as when I 
receive a mowing machine in exchange for a similar prom- 
ise. Having promised to pay money, I am of course bound 
to do so ; but this does not give money a new function. If a 
farmer who was very busy with his fall plowing should bor- 
row a cord of stove wood from his next neighbor, promis- 
ing to pay it back in February, it would plainly be necessary 
to cut a cord for this purpose, and deliver it as promised. 
But no one would think of saying that, besides serving as 
fuel, stove wood has another function ; viz. paying back 
borrowed stoi'e wood. 

Nevertheless, it is often convenient to treat this em- 
ployment of money as a special use, — for the reason that 
much of the money of the country is being transferred from 
hand to hand to do this work of settling debts, and still 
more, perhaps, is kept waiting to be so transferred. We 
must, however, be careful not to let our words mean too 
much. When we say that a large part of the money stock 
is set aside in the bank reserves to be used as a means of 
payment, we do not mean that that money has given up its 
natural function of medium of exchange, and taken on a 
new one as a means of payment. We only mean that cer- 
tain institutions which have borrowed from their neighbors 



28 CHAPTEifS ON MONEY 

considerable quantities of the medium of exchange, which 
they have agreed to return when called for, are quite prop- 
erly keeping on hand a large stock of the said medium of 
exchange, in order that they may be ready to meet their ob- 
ligation to return said medium of exchange. 

One particular case under the use of money as a means 
of payment is perhaps of sufficient importance to deserve 
separate treatment and a special name. It is where money 
serves as a guarantee of solvency. As we are doubtless all 
aware, it is a common practice in the most advanced com- 
mercial nations for business men generally to keep their 
stock of money, or most of it, with a common treasurer 
known as a banker, who makes and receives payment for 
them in money or credit, lends them money or credit, col- 
lects their claims on distant places, and so on. But of course 
the very existence of such a business depends on the strong 
and continued confidence of the public. Knowing that 
banks are at all times liable to be called on to pay on de- 
mand a very considerable portion of the great sums they 
owe, the depositors will have no confidence in them unless 
they can show large sums of actual money ready to be paid 
out at any moment. Accordingly the cash fund kept by 
banks and known as their reserve must be looked on as in 
large measure having its reason for existence in the need 
for such a fund to insure public confidence in the solvency 
of banks. Such money therefore plays the role of a guar- 
antee of solvency; and the importance of this role justifies 
giving it special mention and a special name, though we 
have in this no new function dififerent from that of being 
the recognized medium of exchange. 

In the preceding account of the functions of money 
nothing has been said of an office which is commonly enum- 
erated as one of the most important which money fills, i. e. 
serving as the standard of deferred payments or debts. This 



NATURE AND FUNCTIONS 29 

omission is intentional. Money does not seem to me to 
play any such role. The reasons for this conclusion, how- 
ever, will be better understood after we have learned about 
the monetary standard. Here we will merely outline the 
argument. 

First, money surely can not be the standard of debts or 
contracts in general but only of money debts. That is, 
money obviously can not be the standard of a promise to 
deliver 10,000 bushels of wheat or 500 cords of wood or 
1,500 barrels of apples. The standard for the wheat con- 
tract must be some sort of wheat, for the wood contract 
some sort of wood, for the apple contract some sort of ap- 
ples. The statement, then, can have no other meaning than 
that money forms the standard of money contracts. But, 
secondly, to say that money constitutes the standard of 
money contracts is little short of absurd. If it means any- 
thing, it is a mere identical expression. To say that a con- 
tract is a money contract is to say that money determines 
the thing which must be delivered, and so is to say that 
money is the standard of this particular contract. 

The facts which probably explain the putting forward 
of debt standard as one of the functions of money are these. 
( I ) There must be some particular money out of several 
existing sorts which is valid money, good money, standard 
money, for money contracts; just as there must be some 
particular grade of wheat which is standard wheat for 
wheat contracts on a particular exchange. (2) In a typical 
modern monetary system there is something behind money 
which determines the I'ahic of the unit, fixes the significance 
of one dollar, or one franc, or one pound, in ordinary mon- 
ey contracts. That something is the ultimate monetary 
standard for money contracts. But both these concepts 
will be more fully explained in the next chapter. 



30 CHAPTERS ON MONEY 

PROBLEMS. 

1. How does Jevons illustrate the inconveniences of 
barter? See Money and the Mechanism of Exchange, 
chapter I. 

2. It is commonly said that barter necessitates a double 
coincidence between the exchanging parties. What are the 
tzi'o coincidences meant? 

3. I often say that to make barter possible there must 
be a double coincidence in the amount as well as the kind 
of goods. What is meant? 

4. Using money seems to lengthen the process of ex- 
change by making tzn'o operations necessary where before 
one sufficed. How can such a procedure be described as 
facilitating exchange ? 

5. "A guinea may be considered as a bill for a certain 
quantity of necessaries or conveniences upon all the trades- 
men of the neighborhood." From Smith's Wealth of Na- 
tions. Supposing the writer to mean by "bill" what bus- 
iness men call a sight draft, explain and justify the com- 
parison. 

6. In the above quotation substitute for "bill" the word 
"due-bill," then explain and justify the statement. 

7. Money is sometimes spoken of as "the universal 
commodity." Explain meaning. 

8. Monev is sometimes compared to the shuttle of a 
loom. Why ? 

9. It is sometimes said that money enables us to mo- 
bilise our property. What is meant? 

10. Many people are greatly distressed to have a single 
dollar of money go out of their community for fear their 
stock will be permanently diminished by just that amount. 
Show that this fear seems inconsistent with the very nature 
of money. 

II. In the buying and selling of wheat on a wheat exchange, 
the thing actuallv transferred in delivery is not wheat but 



NATURE AND FUNCTIONS $1 

the right to wheat in the form of elevator receipts. These 
receipts might be called representatives of zvheat; but no 
one would think of calling them representative wheat. So 
a railway trunk check might be called the representative of 
a trunk but would not be called a representative trunk. In 
the case of money, however, no one hesitates to call bank 
notes which promise to pay money representative money, 
rather than representatives of money. Explain the dif- 
ference. 

12. Between 1862 and 1879 there was no standard coin 
in circulation in the United States. Should we say that the 
United States had no money during that time? 

13. Why should bank notes be classed as money while 
bank checks are not? 

14. Read the faces of a bank note, a silver certificate, 
and a treasury note (greenback), and point out the dif- 
ferences. 

15. Horace White in his Money and Banking repre- 
sents the use of money as after all a case of barter, two 
barter transactions being substituted for one. The farmer 
barters his wood for money, then barters the money for 
groceries, dry goods, etc. Show that the point which he 
probably intended to make is not sound. 

16. It seems probable that in the beginnings of the use 
of money, only things having a use-value as great as their 
exchange value could serve the purpose. Why? 

17. In bringing out the requisites of money as a me- 
dium of exchange it is common to emphasize acceptability , 
— money must be something which people generally are 
willing to accept in exchange for their goods. Show that 
rclinquishability is equally necessary, — that money must be 
something which buyers are able to let go. Would dining- 
room chairs make good money? tea? salt? candy? 

18. Why would iron not make a good standard or 
basal money ? 

19. Farmer A arranges with neighbor B to get from 



32 CHAPTERS ON MONEY 

the latter a load of hay in March and pay for it by work 
in the harvest field the next summer. What use of money 
could he advantageously make in connection with the tran- 
saction described ? 

20. Money is occasionally defined something like this : 
"Money is anything which passes freely from hand to hand 
in exchange for goods mid in discharge of obligations, etc." 
Show that it is not necessary to include the words in italics. 

21. General Walker's theoretic reason for holding that 
the phrase "Common measure of values" is wrong (see 
page . . . ) was that values are mere ratios and can not be 
measured. 

(a) Is it proper to say that ratios can not be meas- 
ured ? 

(b) If values can not be measured can they have a 
common denominator? (What is it to be a common denom- 
inator of one-third and one-half?) 

22. Walker's practical reason for discarding the phrase 
"common measure of values" seems to have been his un- 
willingness to admit what he thought implied by the word 
"measure" that only full-weight metallic money, money 
having just as much use value as exchange value, could per- 
form this particular ofifice of money ; whereas he contended 
that a paper money like our greenbacks could do every sort 
of money work. 

Show that he was wrong in supposing that use-value, — 
bullion value, — is necessary to the instrument which meas- 
ures values. Is any kind of value necessary? 

23. If we wish to measure the width of a table, we be- 
gin by laying a rule along the edge. Does all measuring 
involve such direct physical comparison ? Give three or 
four illustrations. 

24. In 1893 the Indian government stopped the coinage 
of silver. In consequence India's standard money, silver 
rupees, advanced in value to a point varying from five to 
ten cents in excess of their bullion value. Were thev as 



NATURE AND FUNCTIONS 33 

good a money for storing value as before the change? 
Would the common people be likel}- to continue to use 
these rupees to make jewelry? 

25. Under conditions easily conceivable bank notes or 
government notes would be a very poor kind of money 
in which to store value. Explain and illustrate. 

26. Bank credit is a still better means for transporting 
value than money. Explain. 

2^. Suppose that a rich Armenian merchant of some 
town in the Caucasus, fearing an attack by Mohammedans 
on all persons of his race, turns most of his wealth into the 
form of diamonds, pearls, gold trinkets and gold coin, and 
buries these in some safe place. Can you think of any way 
to justify the statement that in so far as he takes gold coin 
he is not really using money to store his wealth but rather 
the metal gold. 

28. As the family have five or six bicycles to be taken 
care of, I propose putting up a little shed to hold them, if 
it does not prove too costly. On inquiry I learn that the 
house planned will take 500 feet of lumber and two days' 
labor. Show that I now have occasion to measure value. 

29. Running out of coal in May and needing a little 
for a specially cold day I borrow three scuttlefuls from a 
neighbor, promising to return an equal amount in the fall. 
Later I decide to use coke rather than coal but order the 
dealer to bring along three scuttlefuls of coal to be used in 
paying back the loan. Does this prove that one of the func- 
tions of coal is to be a means of payment? 



CHAPTER II. 
THE TYPICAL MONETARY SYSTEM. 

In the preceding chapter it was our object to get some 
notion of the nature and functions of money in general. We 
nuist next undertake the study of a typical monetary sys- 
tem. Such a system contains several different kinds of 
money, each performing a different office in the system, 
and all organized into a luore or less coherent whole, with 
its scale of denominations, its standard, its various funds, 
and so on. Actual systems are often rather discordant, 
being too much the products of accident ; still they are com- 
monly more harmonious than seems at first sight to be the 
case. Anyhow they nuist be studied as systems in spite of 
their imperfections. 

I. THE DENOMINAI'IOX SYSTEM. 

The first element to be remarked in any monetary sys- 
tem is the system of denominations, that is, the names zvith 
which (jiiaiitifies of money are expressed, e. g. dollar, dime, 
ca-lc. TIk- necessity for some means of expressing quan- 
tities of money is easily seen. Since money is the common 
thing which exchanges against all other goods and since 
these goods range in value from almost nothing to millions 
of dollars, it is necessary that we should be able to make 
up sums of money from the highest to the lowest, and in 
some way to describe or express these sums. Conceivably 
this could be done by the use of the ordinary denominations 
by which weight or bulk is expressed. As a matter of fact 
this seems to have lieen the practice in all early systems. 
The monetary denominations were originally nothing but 



THF, 'I'N'I'ICAI, SYSTlvM 35 

weight denominations, e. g'. the Hebrew shekel, the Roman 
as, the EngHsh pound. 

But. while a procedure like that described is pos- 
sible, it is natural and inevitable that we should come to 
have denominations which express quantities of monex 
rather than quantities of metal. I'irst, just as soon as mon- 
ey became fully differentiated from the mere stuff' of which 
it was made, men would tend to dissociate a siven denomi- 
nation when applied to money from the same denomination 
when applied to metal. Secondly, this dissociation would 
become necessary as soon as governments introduced the 
practice of debasing coin, reducing its weight or fineness, 
so that a shekel or pound of gold coin meant much less than 
a shekel or pound of gold bullion. Accordingly, every well- 
developed monetary system has a full set of denominations 
of its own, the connection of which with weight denomina- 
tions, if there is any, no one thinks of in the ordinary 
course of business. 

Monetary denominations may be divided into Primary 
and Secondary. The Primar y denonii^nation is wdiat we 
more often call the Monetary Umt — that denomination 
which is thought of as fiuidauicnfal in the system, the other 
denominations being referred to it in defining their value. 
The prin iary denomination or monetary unit in the United 
States is a dollar ; in luigland, a pound ; in France, a franc ; 
in Cermanw a mark ; and so on. The Secondary denomina- 
tions are those which are looked on as derived from the 
monetary unit — being multiples or fractional parts of that 
unit. Thus in the United States, the law provides for the 
mill or thousandth of the dollar, the cent or hundredth of 
a dollar, the dime or tenth of a dollar, and so on. Frequent- 
ly a system will contain secondary denominations outside 
those regularly authorized which survive from some older 
order. In our case the survival is illustrated by the shilling, 
still used, though much less often than fifty years ago. 



36 CHAPTEi^S ON MONEY 

II. THE MONETARY STANDARD. 



A. General Aeeoimt. 

The second essential element in a monetary SNStem is 
the inoitetarx standard. The special office of the standard 
is to fix the meaning or ■I'ahie of the primary denomination 
or monetary unit. The precise significance of this statement 
is most easily explained hy comparison with an analogous 
case, the standard of liquid measure. As we all know, there 
are in the United States at the present time thousands upon 
thousands of vessels for measuring liquids which contain 
a gallon or some multiple or fraction of a gallon. Some of 
these measures are made of wood, some of tin, some of 
stoneware, and so on. Some are cylindrical in shape, some 
like the frustrum of a cone, and so on. I'ut nevertheless, 
in one particular, they are all alike or at least intended to 
be alike. As respects their capacity to hold liquids each is 
supposed to be equal to every other. And this equality is 
of ])rime importance. For. if gallon measures were not 
substantially equal in this particular, the significance of the 
gallon would be constantly changing, and so the way would 
be opened for an infinite amount of trouble, error, or cheat- 
ing. Now how is this equality among gallon measures at- 
tained ? How is it brought about that the gallon shall al- 
\va}s signify just one thing? Simpl\' by rec|uiring that a 
gallon measure shall be able to hold a certain fixed amount 
by weight of some one substance, no more and no less. 
The substance chosen is pure water under certain conditions 
of temperature and air pressure. The amount is 8.33 
pounds. This fact we express by saying that 8.33 pounds 
of pure water is the standard of licjuid measure in the 
United States. 

Now the case of money is in this respect substantially 
the same as that of liquid measure. As we are all aware, 
the money unit — one dollar — has very many different forms. 
It shows itself now in the guise of a gold dollar, now as a 



! 



THE TYPICAL SYSTEM 37 

silver dollar, now as a greenback dollar, now as a bank 
note dollar, now as two fifty cent pieces, and so on. In like 
manner it takes the form of private checks, John Smith's 
checks, or H. Jones' check, thus making- possible millions 
of various manifestations of the dollar. Now all of these 
are different and in themselves have very different degrees 
of value. The g-old dollar, for example, is worth just as 
much whether it is coined or melted into a shapeless luni]). 
The silver dollar, on the other hand, is worth as much as 
the gold when it is coined, but less than half as much when 
it is melted up. The paper is practically worth nothing in 
itself. Nevertheless, in spite of the differences in intrinsic* 
value, all these dift'erent dollars are equal in ex- 
change value. What is that one thing to which 
thev each are equal, which (ictcrmiiics conclnskrly 
zvhat one dollar slial! mean in all these various 
manifestations? That one thing is a piece of gold, nine.- 
tenths fine, weighing 2^. 8 grains^ Within the boundaries 
of the United States, in every conceivable connection, un- 
less otherwise specified, one dollar means the amount of 
value which attaches to 25.8 grains of gold, no more, no 
less. If 25.8 grains of gold increase in value 10 per cent, 
so does the dollar. Hence we say that gold is the standard 
of value or the monetary standard of the Liiited States. 
To summarize this explanation in the form of a definition, — , 
the monetary standard in any system , is fliaf thing tlwvalue] 
o f 7chirh f ix es the -c-alii c of the monetary u nit. f 

From the above discussion it appears thaTour monetary 
standard is not one of the moneys used in the system, but 
rather a certain definite quantity of a partieular metal, gold. 
That is, the value of one dollar in the various relations of 
business is in the last issue determined, not by the value 
of a gold coin, but by the value of the quantity of gold put 



* That is, value belonging to it as a substance. The writer doe.s 
not sympathize with the current denunciation of the word "intrin- 
sic." 



389166 



38 CHAPTERS ON MONEY 

into a gold coin. It should, however, be noted that the 
gold coin itself is the immediate standard; since it is the 
value of that coin which in the first instance fixes the value 
of every other form of money. By this I mean that a dol- 
lar in these other kinds of money, instead of being directly 
kept equal to 25.8 grains of gold bullion, is really kept equal 
to gold coin only ; and that consequently its being kept equal 
to the bullion also depends on whether gold coin is kept 
there. That is. if gold coin and bullion separate, the coin 
becoming more valuable than the bullion, the dollar follows 
gold coin rather than gold bullion. 

As a result of this explanation, it seems to be 
necessary to distinguish for the typical monetary system 
an immediate or proximate standard anrl an ultimate stand- 
ard. The ininu'dialc ^timihird is the i)rincipalm< h.k'} . stand- 
ard money , the actual coin, to which all other moneys are 
rated ; the ultimate sta ndard is that thing which deter- 
mines the value of standard money, and so ultimately deter- 
miiTes~rhe valu"e~or^he unit. In case there is nothing be- 
hind the standard money determining its value, then it is 
at once the immediate and the ultimate standard of the 
system. However, the typical system is one wherein the 
value of the immediate standard, i. e. standard money, is 
kept constantly equal to that of the gold bullion in it, 
which bullion, therefore, ultimately fixes the value of the 
dollar and so is the ultimate standard. To secure this 
equality in value of the gold dollar and the bullion in it 
two conditions are provided or permitted. First, the gov- 
ernment coins gratuitously (or substantially so) all the 
gold people ofifer for this purpose. Secondly , people are 
allowed to melt the coins into bullion, if they wish to do so. 
Under these conditions there can be no material difiference 
in value between gold coins and the bullion in them. 

The using of a certain quantity of some metal as the 
ultimate monetary standard "ives rise to some rather curious 



the; typical system 39 

problems as well as to some popular errors which to the stu- 
dent seem very foolish. If the United States makes 
25.8 grains of gold its monetary standard, i. e. makes it^ 
the thing which fixes the value of one dollar, then of course 
the price of 25.8 grains of standard gold must be just one 1 
dollar, — nothing can change it but a change in the law. \ 
Further, since an ounce of gold contains 25.8 grains just I 
18.60-I- times, the price of an ounce of gold must be just 
$18.60+, so long as the law is unchanged. But of course 
we must not understand from this, as people sometimes do, 
that the value of gold — its pozvcr to buy goods in general — 
can not change. Its price can not change, because it is it- 
self the thing which determines the value of the unit in 
which prices are estimated. In other words, the price of 
gold is the value of gold measured in a certain fixed Cjuan- 
tity of gold, which of course can not change. An ounce 
of gold when measured in 25.8 grains of gold will always 
give the same answer. 18.60+ ; or expressed in money, it 
wall be $i8.6o4-. But the value of gold as measured in all 
other goods ten years from now may be greater or less than 
it is today. But in that case the value of the dollar w^ill 
have changed to just exactly the same extent and so the 
price of gold will be exactly the same as no\y. 

Another point with respect to the standard wdiich we 
shall need to have in mind for a later discussion is the dis- 
tinction of the monetary standard of prices and the mone- 
tary standard of debts, or that which determines the value 
of the dollar in prices and that which determines its value 
in debts. At first this putting of the matter seems absurd, 
since the very idea of a standard implies that there can be 
but one. Fixing the meaning of a unit, such as the gallon 
or the pound or the dollar, can not be done by each of two 
or more things. For each of the two or more things might 
be different from every other, in which case w^e should have 
the unit fixed at two or more places at the same time, which 



40 



CHAPTERS ON MONEY 



is of course a contradiction in terms, really meaning that 
the unit is not fixed at all. Thus we could not have two 
standards for liquid measure, 8.33 pounds of water and 
8.33 pounds of sulphuric acid ; for, since the latter fills 
about half the space of the former, fixing the gallon by 
each of them would mean making it at the same time as big, 
and Iialf as big, as 8.33 pounds of water. 

Now it must be admitted, that rightly understood the 
statement just made is surely true. But, then, it merely 
means that ivithiii any oiic field, a particular unit can have 
but one standard. //' different fields ean be distinguished, 
we can have as many different standards as the number of 
such different fields. Thus it is perfectly possible, though 
quite undesirable, that the gallon should have one standard 
in domestic trade and another standard in foreign trade, or 
one standard for oils and another for syrups, and so on. 
So in the case of money it is possible to choose one thing 
to fix the meaning of the dollar in prices, another to fix 
its meaning in debts, still another to fix its meaning in pay- 
ments to government and so on. 

We might go further and say that under each of these 
cases there might be several sub-cases. We could have one 
price standard for foreign trade, another for domestic 
trade. We could have one debt standard for government 
debts, another for railroad debts, another for mortgage 
debts, another for commercial debts, and so on. During 
the greenback period we had one standard, gold, for inter- 
est on United States bonds and duties on imports, and an- 
other standard, the greenback, for most other purposes. In 
general, when the monetary standard is subject to rapid 
fluctuations or its maintenance is doubtful, men are likely 
to determine the debt standard by specific contract in each 
case. Thus, during the agitation against the gold standard 
a few vears ago, promissory notes and bonds were generally 
drawn with a clause providing for payments in gold or its 
equivalent. 



THE TYPICAL SYSTEM 4I 

rUit, while it is possible that a monetary sys- 
tem should have many standards, I hardly need say that 
such an order of things is not at all desirable. It is best 
to have just one meaning or value for the dollar in all con- 
nections ; and this is in normal times the case. x\t least 
the dollar has but one meaning for the great mass of bus- 
iness transactions, — for prices in ordinary sales and for 
ordinary debts. If there are at the same time other stand- 
ards, they are limited to exceptional cases. Few people 
even know that they exist. But. while there is usually but 
one monetary standard in all important connections, it is 
desirable for certain reasons which will appear later* to 
make the theoretical distinction of a standard for prices 
and a standard for commercial debts, meaning by the former 
that which fixes the value of the money unit in price quota- 
tions and by the latter that which fixes the value of the 
money unit in the debts of business men, particularly mer- 
chants and manufacturers. 
B. Different Systems. 

In the above account of the monetary standard we have 
had in luind the typical system of our own time. Its char- 
_^acteristic feature is that the ultimate standard, the th ing' 
\yhich finally Jjjv^s . the value of the unit is alwavs a definite, 
f Quantify of a definite qnality of so jiie one metal. Such a\ 
j standard is known as a single metallic, or monDJuetgUic , 
standar d. l>ut it is possible to have other kinds of stand-"* 
ards. Such have existed in the past, and some have warm 
advocates in our own day. We must now give a brief 
account of these other systems, though the discussion of 
their comparative merits will be reserved for a later con- 
nection. 

Let us take first himctallisrn. This is a scheme to give 
to either or both of two metals the place which in our 
system is given to gold. That is, the laws provide that both 



* Chapter V. 



42 CHAPTERS ON MONEY 

gold and silver coins shall be fnll legal tender, and that both 
shall be freelv and gratuitously coined, while no restric- 
tion is put on the melting of either. In the opinion of most 
writers, this procedure always results in a system best de- 
scribed as an alternating standard — the metal which in the 
legal ratio is overrated always being the standard. In the 
opinion of others, the result is, at times anyhow, a standard 
coni[>o}iudcd of the tzco metals. In either case the system 
would be called legal bimetallism ; though, when it worked 
so as to make an alternating standard, it would be practical 
monometallism. Most of the nations wdiich formerly main- 
tained bimetallism have really given it up and gone over 
to gold monometallism by stopping the free coinage of sil- 
ver. But, as they still make certain silver coins full legal 
tender, their position is more or less anomalous. They have 
the gold standard, but have not made every part of the sys- 
tem to fit. This is the case with the United States, France, 
Germany, Belgium, and several other nations. 

A third sort of standard which is sometimes advocated, 
though I believe it has never been tried, is called s\ mine t al- 
ii sm^ or joint metallism. In this scheme, it is not either 
silver or gold that is to be the standard, but a compound 
of both gold and silver. If the standard metal were to be 
coined at all, it would appear as a coin consisting of so 
many grains of gold plus so many grains of silver melted 
together. Anyhow the money would be so managed as to 
keep the value of the dollar constantly equal to the value 
of such a compound of the t\vo metals. This plan seems 
to have some merits but probably will never be tried. 

In all the above cases, there would be. or at least could 
be, coins made from the standard metal. But this is not 
necessary. It is theoretically possible to have as our stand- 
ard sonic commodity not fit to be used as money at all. 
Thus we might make our standard a bushel of wheat ; that 
is, we might regulate all our monev so that one dollar should 



THE TYPICAL SYSTEM 43 

always have the same value as a b\ishel of wheat. All 
agree that this would be a very foolish thing to do. But 
some able writers strongly favor a system in which a num- 
ber of coininoditics, say forty or fifty, constitute a_^co m p osit c 
or multiple standqrd. On their plan, the dollar would al- 
ways be kept just equal in value to some fractional part of 
a certain list of goods. — thus making this list of goods the 
standard. Whether such a system could be made to work, 
and. if so. whether on the whole it would be better than 
the present, we can not now discuss. Certainly no nation 
has vet adopted it, or seems likely to do so in the near 
future. 

It perhaps ought to be added to this account of the 
multiple standard that such a standard might be made the 
debt standard for long-time debts, without being the stand- 
ard of short time debts or prices. Such a scheme has been 
favored by a number of authorities. In that case, the loan 
would be made in money and paid in money, but would be 
reckoned in multiple units ; so that the amount of money 
paid back would not necessarily equal the amount received 
bv the borrower but would change as the money value of 
the multiple unit changed. Thus, suppose I were to bor- 
row $500 on this plan, wdien the multiple unit was worth 
$100. Receiving the money, $500, I would give the lender 
a note for 5 multiple units. If, when my note became due 
the value of the multiple unit were $95, I would pay back 
5 times $95. or $475. If the multiple unit were worth $105, 
I would pay back 5 times $105. or $525. 

In the four cases which we have studied, the monetary 
standard has always been a definite quantity of some mater- 
ial substance or substances. We must now explain a fifth 
case, which is historically of great importance, wherein the 
standard is merely one of the moneys of a country, — there 
being nothing outside that money as money which fixes its' 
value, neither its own substance nor any other. The best 



44 CHAPTERS ON MONEY 

illustration of this case is furnished by fJat money or irre- 
d can able lei^al fend er paper. Take our own monetary sys- 

I mwiiMi— mi I I II I II ' ■' 

tern between 1862 and 1879. During- that period our money 
consisted largely of United States notes which were legal 
tender for most purposes, but were not at the time redeem- 
able ; that is, though there was printed on them a promise 
of the United States to pay money (specie) the promise 
was not being kept. Now. for a variety of reasons, these 
notes circulated as money : but their value, as measured in 
goods or gold, moved up and down very irregularly, es- 
pecially during the earlier part of the period, according as 
the confidence of people in their ultimate redemption var- 
ied, or as their amount was changed, or as the needs of bus- 
iness for a medium of exchange rose or fell, and so on. 
But, in spite of these constant changes in the value of green- 
backs, they were after all the standard of value. For dur- 
ing the whole period the value of the dollar in prices, in 
debts, in taxes, and so on, kept right along with the value 
of the greenbacks. All rating of the values of things was 
in the greenback dollar. This was true even of anv kind 
of money which dilTered in value from the greenbacks. 
Thus, when in 1865 a gold dollar was worth about twenty- 
three cents more than a greenback dollar, this fact was ex- 
pressed, not by calling the greenback worth seventy-seven 
cents, Init by quoting the gold dollar at one dollar and 
thirty cents. 

Some writers in their extreme hostility to fiat money 
have denied that it can ever be a standard. I sympathize 
with their hostility to fiat money ; but the position it leads 
them to take is quite untenable. That fiat money can be a 
standard is conclusively established by an appeal to his- 
tory. If has been a standard — it has been the thing which 
fixed the meaning and value of the monetary unit. It was 
a very poor monetary standard ; but the monetary standard 
it certainly was. 

l*)Ut the fiat money standard is not the only case of a 



THK TVIMCAI. SYSTliM 45 

money standard of value. We can also have a coin stand- 
ard. Such a standard exists, when the value of the mone- 
tary unit is fixed hy some coined money which itself varies 
in value independently of the bullion in it, as also of any 
other object. If a ^^overnment does away with the free 
coinai^e of its onl\- lei^al tender money, the value of such 
money nearl\- always rises above that of the metal in it. 
Having done so, it does not stay at any fixed point, say 
twenty per cent, above the Inillion ; but constantly fluctuates 
up and down. Its value is, therefore, not determined by 
the bullion in it or by any other substance, but is self-deter- 
mined. I'.ut, since the value of all other moneys is deter- 
mined bv this overvalued money, while its own value is 
not determined by anything outside itself. // is the mone- 
tary standard. In earlier times coin standards were almost 
universal. This resulted from the fact that nations seldom 
had free and gratuitous coinage, and seldom permitted the 
free melting of coins. As a consequence the value of the 
standard coin which fixed the value of money in general 
was to a considerable measure independent of the value of 
the bullion in it, being sometimes above, sometimes below 
the latter. 

111. THK DIl'FERENT KINDS oK MONEY. 

In the two sections preceding, we have studied the first 
two factors or elements in a monetary system ; viz., the de- 
nomination system, and the standard. We must now take 
up the money itself, the stock of coins and bills in actual 
use. 

A. The Snrfaee Distinctions amoiii^ Moneys. 

Almost anv group of objects can be classified in a varie- 
ty of wavs. To this rule moneys are no exception. How 
many and what kinds there are depends on the point from 
which we view them. Some classifications are on the basis 



46 CHAPTERS ON MONEY 

of composition, some on that of legal standing, some on 
that of function, and so on. We shall find it convenient to 
be familiar with most of these. In presenting them I shall 
begin with the more superficial distinctions among moneys, 
reserving their classification o>i the basis of fniictioii for the 
last. 

In the Ignited States at the present time, there are eight 
authorized kinds of money. In addition to these, there are 
two, viz. treasury notes of 1890 and legal tender certifi- 
cates, the issue of which has recently been discontinued and 
^ >,~^_, their retirement provided for. There are, finally, a few 
''"'^^^ ' ^•': thousand dollars in various obsolete treasury notes and 
bank notes, the issue of which ceased long ago, but which 
,. -^ ^^have never been presented for redemption, and which are 
. ' probably, to a small extent, used as money still. The eight 
^ rL-\i (r .^ authorized moneys are 

fi. Gold money (coin or bullion), 



' 3- 



Silver dollars. 
Silver fractional coins, 
4. Minor coins, nickel and bronze, 
r S- Ignited States treasurv notes (legal tenders) (green- 
go>t^Wks), 
W^^"\ 6. National Bank notes, 

7. Certificates for gold coin or bullion, 

8. Certificates for silver dollars. 

Oi these eight moneys, two ; viz., gold certificates and 
silver certificates, can be at least temporarily disposed of 
bv counting them under the corresponding metallic mon- 
evs ; for these certificates are in the strictest sense repre- 
sentative money and, hence, for most purposes should not 
be recognized as having any separate existence. Corres- 
ponding to every dollar in circulation in the certificate form, 
there is locked up in the vaults of the United States treas- 
ury an equivalent amount of metal in coin or bullion, waiting 
to be delivered to the man who presents the certificate. That 



THE TYPICAL SYSTEM 47 

is. the certificates are warehouse receipts, such as the man- 
ager of a wheat elevator gives to the owners of the wheat 
which is stored in the elevator. These certificates, there- 
fore, do not constitute another kind of money in addition 
to the corresponding;- coin. They are rather documents 
which indicate the ownership of the coin. Consistently 
with this way of looking at the matter, we shall usually 
sav, not that there are in circulation, let us say, 60 mil- 
lions of silver dollars and, let us say, 400 millions of silver 
certificates, but rather that there are in circulation 460 mil- 
lions of silver dollars. 60 in the form of coin, 400 in the 
form of certificates. 

The number of moneys which w^e have to consider in 
studying the system of the United States is thus reduced 
from eight to six. Classifying these on the basis of com- 
position, the first four go together as metallic money, the 
fifth and sixth as paper money. Again, the four kinds of 
metallic money naturally break into two groups, full weight 
coin and base or overrated coin. The former means coin 
which has substantially the full amount of metal necessary 
to make its bullion value the same as its money value. It 
includes only gold money, though, as already indicated, 
this must be understood to mean some gold in bar form 
as well as coin. Overrated coin is that which has an ex-_ 
change value greater t han its bullion value. It includes 
with us si lver dollar s, silver fractional c«jin, nickels, and 
bronze coin . 

The coins made of nickel and bronze commonly go 
together as minor or token coins. As the designation token 
coin implies, this money is frankly a mere substitute. It 
never pretended to be real money. It was always a sort 
of metallic due bill or note which was used as a convenient 
substitute for the real thing. Fractional silver commonly 
goes by the name of subsidiary coin ; and silver dollars are 
often classed with them. There are no longer any good 
reasons for distinguishing minor and subsidiary coins. In- 



48 CHAPTERS ON MONEY 

deed, speaking broadly, it is quite proper to put together 
Ukvu coin, su bsidiary silver , and sil ver do llars as subsidiary 
or token money ; though there are some peculiarities of the 
silver dollar which must be brought out before v^e get 
through. 

Metallic money should be distinguished again with re- 
spect to the conditions of issue. I^ii the U nited States gold 
is frcclv and gratuitously coined^ or gratuitously coined on 
private account ; that is, an} one can take gold bullion to 
the mint and get coin in exchange without charge for coin- 
age or for anything save parting, assaying, and the alloy. 
TIk- (ither metallic moneys are coined only on govern ment^ 
account. By this we mean that the government buys the 
metal, has it made into coin, and pays out this coin as occa- 
sion requires, or sells it to individuals in exchange for other 
monev. The difference in value between the bullion wh ic h, 
goes into the fractional coins and thc^coins thcinsclves goes 
t(t the government as a profit, and is commonly called 
sri"iiii)i-at'C. Some ofovernments, in minting freelv coined 
or standard money, make a charge for the work more or 
less in excess of cost, thus making a profit on this kind of 
monev as well as on subsidiary coin. Such a charge is also 
known as seigniorage. A charge which m erel\- covers cost 
or less is known as brassage. 

Turning, now, to Paper money, and omitting certificates 
as not properly to be distinguished from the money they 
represent, we have two sorts; viz.. treasury notes_and bank 
ii otes. As the name note implies, both of these are prom- 
ises to pay money, and are issued, the one by the United 
States treasury, the other by some national bank. The 
treasury notes arc ijayable only in gold, the l)ank notes in 
anv legal tender money. Of these forms of paper, the bank 
note is most typical, having a counterpart in almost every 
monetary system. The treasury note is less universal, but 
is found in several countries. Some natioins, however, 
which do not circulate treasury notes have a special bank 



THE TYPICAT< SYSTI5M 49 

note almost as different from the ordinary one as is the 
treasury note. That is, they have a note issued by a great 
central bank having special rights, which note also has 
special prerogatives, often, for example, being legal tender. 
As to their essential nature, notes should be sharply 
djsfiuguished from certificates. The latt er, as was explained 
al)()w. arc mere \varelK)Usc receipts^ They go out only as 
the gold or silver comes in. They, consequently, add noth- 
ing to the circulating medium, save in the sense that they 
will sometimes stay in circulation when the metal they rep- 
resent would not. Circulating notes on the other hand, are 
promises to.^pay, Tliey go out, not because coin has been, 
brought in, but l)ocausc the receiver is willing to be a cred- 



thc institution which issues them. They, therefore, 



increase the currency to the full amount issued, less only 
the amount of money necessary to meet occasional calls for 
redemption. Thus the issue by the national banks of about 
$500,000,000 in notes effects a net gain in credit money, 
after deducting five per cent for the reserve, of $475,000,000. 

Circulating notes give rise to some other distinctions 
which should be noted. Ordinarily they are promises to 
pay on demand and ordinarily the promise is kept. In that 
case they are said to be r gderi wj^lj: or ^aomicxtShlsL. At 
times, however, the issuer stops paying them on demand ; 
in which case he is said to have suspended specie or legal 
money payments, and the notes are called irredeemable or 
inconvertible. Sometimes the issuer omits the words "on 
demand," simply saying that he will pay the bearer so 
much. In some cases notes are made payable after some 
contingent event, like the success of the revolutionary gov- 
ernment which issues them. 

In the United States, if notes issue d by the Treasury 
are irredeemable and at the same time legal tender, th^y 
are often called fiat money. Throughout this book, how- 
ever, t he phrase fia t money is applied to any money wheth- 
er paper or coin, which is (tverrated, that is, has a higher' 



50 CHAPTERS ON MONEY 

exchange than substance value, which is at the same time 
legal tender, and which is not redeemable in any other 
money. At present silver dollars are fiat money. For they 
are as metal worth less than forty cents, but they pass for 
a dollar, and are legally entitled to do so, and they are not 
redeemable. Treasury notes are not at the present time 
fiat money in this sense, because they are redeemable. In 
the United States the authorized treasury notes are often 
called greenbacks or legal tenders. Bankers, for a number 
of years, reserved the expression treasury notes for a par- 
ticular class of such notes ; viz. those issued in purchase of 
silver under the act of 1890; but these are now no longer 
authorized, and are rapidly disappearing. By bankers the 
word currency is some times employed to include paper 
money in general, sometimes all the paper except bank notes. 
Another way of looking at our different moneys is from 
the standpoint of their legal tender status. How far does 
the law authorize a debtor to force them on an unwilling 
creditor? This really gives two questions, (i) is a money 
legal tender in all relations? (2) is it legal tender to any 
amount? If we answer yes, to both of these questions in 
the case of any particular money, it is to be characterized 
as a iiiiiz'crsal and unlimited legal tender. If it can be 
paid only in special cases, but then to an unlimited amount, 
it is a partial nnliinitcd legal tender. And so on. From 
this standpoint our moneys including certificates fall into 
four classes. ( i ) Gold coin and silver dollars ( also treas- 
ury notes of 1890) are^a universal and unlimited legal ten- 
der. (2) Subsidiary and minor coins arc a universal bill 
limited legal tender, the former to the amount of ten dol- 
lars, the latter to the amount of twenty-five cents. (3) 
* Treasury ujotes (including those of 1890) are a universal 
commercial or private tender, but a partial tender in the 
relations of the Federal government and outside parties. 
They are not legal tender in payment of interest on the 



Tiriv TYlMCAf, SYSTEM 5 1 

public debt nor of duties on imports,* nor in redeeming 
other trc:isur\- notes. (4) liaiik notes and certificates are 
commercially, or in private relations, non-legal tender, but 
are legal tender to national banks, and a partial tender in 
pa\ments between the Federal government and the public. 

B. The Distinction uf Principal and Subordinate Moneys. 

So much for the more superficial classification of mon- 
eys. We must now go into the deeper phases of this mat- 
ter. One of the most fundamental distinctions among 
moneys is that of ( i) Principal or Standard, and (2) Sub- 
ordinate moneys. It is scarcely necessary to say that if we 
are going to have dift'erent kinds of money at all, and this 
was certainly inevitable, this fact would necessariU- o-ive 
rise to the question hozc shall these various moneys be re- 
lated to one another. Several plans are thinkable, and in- 
deed have been one time or another realized. The dift'erent 
moneys might be quite independent of one another, no ef- 
fort being made to maintain any community among them 
even in respect to denomination. In the same time and 
place silver coin might be used for some money purposes, 
gold bullion for others, and every day products for others. 
But manifestly it would be quite inconvenient to carry on 
such a system or lack of system, and a highly advanced so- 
ciety would certainly replace it with a better order, — would 
in some way co-ordinate the moneys into one system, with 
a common set of denominations and with moneys of the 
same denomination equal in value. 

This result, again, we might attain in any one of several 
ways. The different moneys might be co-ordinate in rank 
and mutually independent, but managed in such a way as 
to keep them equal in value. Thus for several centuries 
in most European countries, both silver and gold were full 
money and co-ordinate- in rank ; but an attempt was made 
to keep them together by recoining one or the other from 



* This limitation has not been enforced since 1879. 



52 CHAPTERS OX MONEY 

time to time and putting in more or less metal as might 
be necessary to make the two kinds just equal in value. 
A similar result might perhaps be reached by keeping each 
of the moneys, while still independent of every other, equal 
in value to some outside thing, though I do not know of 
any historic case illustrating this plan. 

But, while it is theoretically possible to have a system 
wherein the different moneys are co-ordinate in rank though 
kept equal in value by wise management, the practi ce of our 
own day is to treat one of the moneys as principal and all^ 
the others as snbordinate. The principal money, which we 
shall usually designate as standard money, is made to set 
the pace, to fix proximately the meaning of the money 
unit ; while the subordinate moneys are kept equal to it, 
either by providing for their convertibility into it, or by 
so managing them that convertibility will be unnecessary 
or will be effected indirectly. The relation between the 
two classes of money is often brought out by designating 
them respectively as Real money and Represeiitati ve_ _or 
Credit monev. Even where the subordinate moneys are 
not redeemable in real money, they are convertible into that 
money by various roundabout processes and hence in a 
sense are credit moneys — promises to pay real money. 

In a typical system of the sort described, if the 
subordinate moneys were brought into existence to meet 
a felt want, they are given the characteristics which fit 
them to satisfy that want and at the same time insure that 
these moneys shall not encroach on any function not their 
own and therefore shall not endanger the system as a 
whole. If any particular one of the subordinate moneys 
is the product of accident rather than of an effort to satisfy 
some special need, we still try to find a function for it and 
to fit it for that function in order to insure the harmonious 
working of the whole. And I think I may truly say that 
greater success is attained in this particular than is com- 
monly sui)posed. Even the system of the United States, 



TIIIC TYPICAL S^'STF,M 53 

which is often spoken of as a mere aggregate of unrelated 
moneys having their origin in the accidents of practical 
politics, has a high degree of unity and coherency, the re- 
sult partly of unconscious evolution and partly of wise 
legislation. 

C. Shvidard Money. 

We will now proceed to set forth more fully the real 
nature and functions of these different moneys. The essen- 
tial nature of standard money has already been suggested 
in calling it the principal money. Tt is the moncv which 
sets the pace for moneys in general, the unh one which is 
sclf-(le|)endent. or at least dependent, not on some other 
money. Init on siMnething quite outside all the moneys. It 
is the money to which all other moneys are subordinate, the 
one on which all other moneys are more or less dependent. 
Standard money is often said to be the only real money, 
all others being merely representatives of it. 

Another characteristic of standard money, which seems 
distinguishable from that already brought out, is this, that 
it is the only money which embodies the ultimate standard, 
if any one does th is, or it is the only money which is kept 
in immediate connection with the ultimate standard, if that 
standard is quite outside the moneys themselves, not being- 
embodied in any of them. St andard money embodies tlTe_\ 
ultimate st andard in a system such as ours wherein it is §,/ 
^full-weig ht metallic money, having not only the same( 
money value as the standard but also the same bullion val- ( 
Ue. Standard money also embodies the ultimate standarcL' 
when it is itself the ultimate standard, as was the case with 
our treasury notes between 1862 and 1879. Standard mon- 
ey is merely kept /;/ immediate connection with the ultimate 
standard when it is a paper money or an overrated coin 
which by skillful management is kept equal to a certain 
quantity of gold or silver. In such case standard money 
may be said to represent the ultimate standard rather than 



54 CHAPTERS ON MONEY 

to eml)0(ly it. But it is the only money which does so. All 
other moneys merely represent //. Thus in the Philippines 
at the present time there is no money that embodies the ulti- 
mate standard which is 12.9 grains of gold. But there are 
overrated silver pesos which by skilful management are 
kept equal in value to 12.9 grains of gold and to which 
other forms of currency are kept equal. These pesos, there- 
fore, seem to constitute the standard money of the Philip- 
pines, the money which represents the ultimate standard, 
which forms the channel of communication between it and 
other moneys. 

Looking at the characteristic of standard money just 
brought out from a slightly different standpoint, we may 
set forth, as one of the marks of standard money, the fact 
noted on page "^38 that it constitutes the proximate or im- 
mediate standard of the system, — the thing which most 
immediately fixes the value of the money unit. Thus, while 
a lump of gold weighing 25.8 grains is the ultimate stand- 
a rd of ou r monetary system, gold coin is the proximate 
stanclard. The dollar in treasury notes, bank notes, silver, 
checks, and so on, keeps with the gold bullion, only because 
the gold coin to which they are kept equal itself keeps with 
gold bullion. If gold coin and gold bullion should get 
separated, the dollar in notes, silver, and so on, would fol- 
low, not gold bullion, but gold coin. 

Finally, it should be added that in almost all modern 
monev systems the nicest characteristic and decisive marks 
(^f standard money'are two legal prerogatives, .( i ) f^J^jy legal 
tender and (2) free coinage. In giving any mone}^ these 
m two^prerogatives, the purpose of the legislature is to make 
such money the standard money and to make the metal 
from whicli it is coined the ultimate standard. If these ends 
are not accomplished, it is because of some inconsistent 
provisions or because of errors in administration. 

When discussing the monetary standard in the early 



TIIK TYPICAF, SYSTEM 55 

part of this chapter we brought out the poiut that a system 
could have different standards for chfferent relations, e. g. 
one for commercial debts, one for government debts, one 
for taxes, one for prices in home trade, one for prices in 
foreign trade, and so on. It should be noted that a similar 
statement can be made with respect to standard money. It 
is quite possible to conceive a system wherein every one of 
these fields has its own special standard money. Such a 
system would be a very awkward one indeed, and fortunate- 
ly no such exists. But in times when the standard seems 
likely to change, attempts are made to maintain one special 
money as standard money for a particular field. At such 
times the lender specifies that the debt must be paid in 
some special money, say, gold coin of full weight and fine- 
ness. l>v this he does not mean literally that he wants gold 
coin, but only that the dollar in the contract shall be under- 
stood to have an amount of value equal to that of standard 
gold coin. If a new money has come in and gold has gone 
to a premium being worth $1.85 in the new money, he will 
take the new money in payment but only at a rate of $185 
per $100. Such a provision in a contract fixes the standard 
money for that contract, the money which determines the 
meaning of a dollar as used in that contract. At the pres- 
ent time, we have little occasion to recognize dift'erent stand- 
ard moneys ; but for certain theoretic purposes it is neces- 
sary to distinguish in thought two cases, viz. (i) the stand-' 
ard iiwiicy for prices and (2) the standard money for debts. ) 

This is perhaps as good a place as any to finish up a 
matter commented upon at the close of the first chapter, 
i. e. the practice of giving as one of the functions of money, 
being a standard of debts. It was explained, when the 
matter was formerly mentioned, that money surely can not 
be a standard for any kind of debts but money debts, and to 
say that money is a standard for money debts is meaning- 
less. It was further remarked, however, that there needs 
to be a standard money and an ultimate standard for money 



56 CHAPTERS ON MONEY 

debts. This statement is now perhaps fairly clear, as of 
course it could not be when first made. There needs to be 
some particular money which immediately determines the 
the value of the money unit in money debts which, there- 
fore, is the standard money of money debts. Further, if\ 
we are not satisfied to have this standard money floating 
around loose but wish to anchor it to a definite quantity of 
some material substance, then there must be some out- 
side thing which determines the value of the standard 
money and so ultimately determines the value of the money \ 
unit in money debts. That something constitutes the ulti-/ 
mate standard of money debts. 

We have considered the nature of standard money. We 
come next to the functions assigned to it as a part of the 
monetary stock. Standard money, as we have seen, is the 
pace-setting money, the one which fixes the proper value 
of inferior or subordinate moneys, and the one which im- 
mediately fixes the value of the money unit in other rela- 
tions. But some special provisions are necessary to keep 
inferior moneys up to the mark set by standard money ; for 
all the inferior moneys are intrinsically worth much less 
than their face value and in the absence of hindering forces 
would naturally fall away from their face value, — a result 
which, for various reasons, is in the highest degree unde- 
sirable. Further, there is probably no really eiTective meth- 
od of holding inferior moneys up to standard money which 
does not involve the presence in the monetary stock of a 
considerable amount of standard money. For, though it is 
doubtless true that good management, particularly a rigid 
limitation of the amount, can do much toward holding up 
the value of any non-standard money, still ther e is o nly 
one sure way of doiu^' llic work, viz. to keep such non-stand- 
ardmoj iex direetlx eoiiz'ertihle intn standard money. Per- 
sons needing to exchange any inferior money for standard 
monev must be able to do so without material difficulty or 



*• ' ^ THE TYPICAL SYSTEM 57 

else the inferior money will become less valuable. But to 
insure this condition it is almost indispensable that at one 
or more points in the system there should be maintained . 
funds of standard money from which this kind of money 
will be given in exchange for one or more of the inferior 
moneys to all persons who may apply. ( )ne of the most 
important functions, therefore, of the actual stock of stand- 11 
ard monev is to make up these fiDids or reserz'es which need '■ 
to be kept for the redemption of inferior moneys, and in 



cioijigtliis to iiiai)itaiii the parity of inferior jnoneys,^ 



\[ 



A second function of standard nionex' wliich is accom- 
plisTied along with the first, though it should be distin- 
guished from the latter, is maintaining^ staiidani money in 
its place, that is, keeping the place filled by the same money. 
It was just explained above that, unless something is done 
to hinder such a result, inferior moneys are likely to fall 
in value from the standard and that this is for various rea- 
sons quite undesirable. One of the most important of these 
reasons is the fact, which will, later be explained, that, if 
one of the inferior moneys, zvhich is at the same time a full 
legal tender,"^' becomes cheaper than standard money, it will 
oust from the position of standard money the present in- 
cumbent and itself usurp the place. As this would mean 
a sudden change in the value of the money unit, thus alter- 
ing without warning the meaning of all existing contracts, 
it is plainly something to be avoided at almost any cost. 
It is thus of prime importance that those inferior moneys 
which arc legal tender should be kept convertible on de- 
mand into standard money, as a condition necessary to the 
maintaining of standard money in its place. This then con- 
stitutes one of the most important uses, indeed the most 
import ant use, to which the stock of standard money is put, 
viz.. m aking up the reserves from which legal tender infer- 



\ 



* This may happen in the case of a money which is only by 



custom a good tender. 



58 CHAPTERS ON MONEY 

ior monevs* are redeemed, and so keeping standard money 
in its pla ce. _ 

^ We have jnst seen that the most important nses of stand- 
ard money in any system are to maintain the parity of in- 
ferior monevs and to maintain standard money in its place. 
These functions might be called systemic or organic, that 
is, their business is to keep the money system as a whole in 
good running order. But it must not be supposed from this 
that standard money never does any of the ordinary, reg- 
ular, work of money as a medium of exchange. In some 
European countries and in certain parts of this country — 
on the Pacific Coast particularly — gold is still employed 
as a common medium of exchange and means of payment 
for transactions needing money of the middle denomina- 
tions, say from about two' dollars to twenty. But by all 
odds the most important case where standard money is 
still jemployed for ordinary monetary purposes is in inter- 
national trade, where it is the usual means of payment be- 
tween international bankers. The explanation of this point 
needs a new paragraph. 

• In general there is in international trade very little direct 
pavment with money between buyer and seller. What hap- 
pens is that the seller turns over to his banker his claim 
for monev on the buyer, or the buyer turns over to the seller 
a claim gotten from his banker on some bank in the seller's 
countrv. In either case, the seller gets his pay from a bank 
in his own country, while the buyer makes payment to a 
bank in his own country. This leaves some banks in the 
buver's country in debt to some banks in the seller's coun- 
try. Naturally this one debt will not be settled by itself ; 
since there will be sales of goods in the opposite direction 
])roducing debts in the opposite direction, and these two 
opposing debts can easily be offset against each other, thus 
making unnecessary the sending of money either way. 



* At least one inferior legal tender money. 



THE TVPICAI, SYSTEM 59 

What happens to these two debts tends to happen to all the 
reciprocal claims of two countries on each other. That is, 
those on each side will get into the hands of bankers and 
will be offset against those on the other side, thus tending 
to eliminate all use of money in this sort of trade. But it 
will turn out at times that the balance between the bankers 
of one country and the bankers of some group set over 
against it, ])ersists in going one way for some weeks; that 
is. the country is continuously a creditor or continuously a 
debtor. In such a case it will usually be necessary that the 
money itself should be sent one way or the other. But for 
this purpose none of the subordinate moneys of any country 
will answer; for their value being largely fictitious, due 
to laws or customs which are merely local, the bankers of 
other countries will not accept them, but insist on receiving 
monev which has metallic value and receiving such monev 
at a rate corresponding to its metallic value. Standard 
metallic money, therefore, is employed for this purpose. 

D. Quasi-Standard Money. 

We have now a notion of the nature and functions of 
standard money, the principal money of any system. We 
must next consider flic sidwrdiiiatc or auxiliary mojicys. 
First in im])ortance among these is one which I shall call 
Quasi-Sfaiidord money. As we have just learned, Jhe most 
important functions of standard money are systemic, i. e. 
tTiev arc concerned with keeping the whole monetary sys- 
tem in good working order ; and these functions are (i) main- 
taining inferior moneys at par and (2) maintaining stand- 
ard mone}- in its place. Now it has thus far been implied 
that this work is done by standard money only; and, speak- 
ing broadlv, this was the earlier practice. Each kind of 
inferior money was kept convertible into standard money 
(lirectlv, and all were of substantially the same rank. But 
in the course of the nineteenth century most of the leading" 
countries developed another system, a system in which one 



6o CHAPTERS OX MONEY 

of the subordinate moneys is selected to assist in the task 
of maintaining the parity of inferior moneys. Such a mon- 
Sj ey I call quasi-standard money. 

The conditions involved in working out this scheme 
are these two. First, the subordinate money in ques- 
tion is made a full legal tender. Secondly, thfs "money is 
itself kept directly convertible into gold or standard mon- 
ey. The second condition keeps this money at par with 
standard money. The first condition permits it to be used 
rather than standard money to redeem the other inferior 
moneys, or credit substitutes for money, which are there- 
fore kept at par with if. But, since it is at par with stand- 
ard money, the inferior moneys, though redeemable only 
in it, are also kept at par with standard money. According- 
ly, money of the sort described must be looked on as de- 
cidedly higher in rank than other subordinate moneys, and 
as one which in a measure performs the functions which 
naturally belong to standard money. I therefore call it 
quasi-standard money. To contrast this sort of money with 
standard money proper, as the latter is sometimes called 
the money of ultimate redemption, so this might be called 
the money of proximate redemption. A good illustration 
f of quasi-standard money is the legal tender treasury note 
I of the United States, the so-called greenback. Being kept 
/ at ])ar with gold coin by redemption and being substantially 
' a full legal tender, it answers just as well as gold coin to 
make up a large proportion of the funds which need to be 
t kept to redeem fractional coins and bank notes. 
V In addition to this function of maintaining inferior mon- 
eys at par, there is another duty naturally belonging to 
standard money which in a considerable measure falls on 
(juasi-standard money, viz., acfi)ig as banking reseri'e mon- 
ey.. In explaining the uses of money in Chapter I, I pointed 
out that because of the existence of banking, a business 
which takes care of the ordinary working funds of individ- 
uals and corporations and, therefore, is always in debt for 



THE TVI'IC.M, SYSTEM 6l 

large sums payable on demand, it is necessary that there 
should be stores of idle money kept ready to meet such 
obligations, which stores are called reserves. Now it will 
readily be seen that these reserves need to consist of money 
which is able to pay debts. Doubtless with many creditors 
any money will answer. But to meet the case of creditors 
who may prove exacting, there must be in the reserve a con- 
stituent which consists of legal tender money, money which 
the creditor is obliged to accept in settlement of his claim. 
Now, if only standard money had this status, the reserves 
would need to consist largely of such money. But as mat- 
ters are, the standard money constituent may, without harm, 
be quite small save at certain points where gold is especially 
needed. In all ordinary cases quasi-standard money — a 
legal tender money redeemable in standard money — does 
the work just as well. At the present time almost one-half 
the national banking reserve, excluding New York City 
and the Pacific Slope, consists of legal tender treasury notes, 
i. e. quasi-standard money. 

In this account of quasi-standard money I have had in' 
mind more particularly the system of the United States ; 
but, as already implied, this kind of money is not peculiar, 
to this country. England's case is still more typical. In I 
her systeni the quasi-standard money consists of the legal 
tender notes of a great central bank — the Bank of Eng- 
land. These notes only are constantly convertible into gold, 
— other notes and bank credit being commonly convertible 
merely into Bank of England notes. In other words, the 
lesser banks generally keep their money reserve in the 
shape of Bank of England notes. 

B. Circulation Moneys. 

Having disposed of standard and quasi-standard money, 
the remaining kinds may be grouped together as Circulation 
Money. As the name indicates, these are moneys specially 
fitted, and almost exclusively used, to serve as the everyday 



62 CHAPTERS ON MONEY 

medium of exchange. They are being passed from hand 
to hand in payment for goods or services or are being held 
ready for this use in the near future.* In general, circula- 
tion money needs to show very great i^ariety as respects dc- 
iioiiiiiiafion ; since, being actively employed in effecting all 
sorts of transactions, it needs to be available in almost every 
imaginable amount. ( )f course we can not attain this by 
having an infinite number of denominations. Instead we 
make up irregular amounts by effecting the proper combina- 
tion among several different denominations. Still this ne- 
cessitates a considerable variety. Again, because circula- 
tion money must show variety in denomination, it must also 
show I'ariety in composition. We can not very well make 
cents out of gold or dollars out of copper. For smaller 
moneys we employ cheap metals, using three different ones 
for denominations under twenty-five cents. For larger de- 
nominations gold is used more or less, but, generally speak- 
ing, nothing will do in this country but paper. 

Classified in a somewhat superficial way, the circulation 
moneys of the United States, excluding standard and quasi- 
standard moneys, are three, Xl^ bank notes for larger de- 
nominations ($io and upwards), [2} fiat silver or its certifi- 
cates for the medium denominations (one dollar to five), 
and (3) base or subsidiary coin (including fractional silver, 
nickel, and bronze), for the small denominations. The first 
of these, bank notes, we can not well consider in detail, 
at this stage of our study. Their general character, how- 
ever, is plain enough. They are credit money, promises to 
pay lawful money on demand or at sight, issued by banks, 
and commonly used as monev. The second kind of circula- 



* It must not, however, be supposed that the moneys .ilready 
considered, standard and quasi-standard, are never used for circu- 
lation purposes. They still perform this function in some measure, 
but they are not specially adapted for the purpose, — are in some 
cases intentionally made unfit for the purpose, — and tend to leave 
the work of circulation to specially devised moneys. 



THE TYPICAL SYSTEM 63 

tion money, fiat silver, is more or less of an anomaly, an 
accident, a fifth wheel. In function and nature it most re- 
sembles base or subsidiary coin ; hence its peculiarities will 
be most easily explained after we have considered subsid- 
iarv coin. We begin, then, with the latter. 

The existence of base or token ov subsidiary money has 
its explanation in twt) facts. Thirst, as long as a metal of 
any considerable value is chosen as the standard, coins made 
of that metal will be too small for convenient use where 
small denominations are wanted, and so some representa- 
tive or substitute money will be needed, v'^econdly, paper 
money is too frail to be suitable for the work which small 
denomination money has to do. Accordingly, the moneys 
of small denominations need to be representative or sub- 
stitute moneys made of cheap metals other than the stand- 
ard metal. That is, we need in the circulation one or more 
metallic moneys — coined moneys — different from the stand- 
ard money as to their composition, yet all the time subordi- 
nate to standard money, not displacing it, and having their 
value fixed by it. Such moneys are properly called sub- 
sidiary. In the United States they include bronze cents, 
nickels, silver fractional coins (to which name subsidiary 
coin is most strictly applied), and silver dollars when cir- 
culating as coin. In essence, then, subsidiary money is a 
metallic representative, or substitute, money used chiefly 
for purposes of circulation. 

Let us now give a more detailed account of the charac- 
teristics which belong to this kind of money in the United 
States at the present time. As the first characteristic we 
have the fact already brought out, viz. its manufacture from 
some niefa l different from standard metal. But this first 
characteristic naturally leads to one or more others. If 
subsidiary money is made of some substance different from 
that used in standard money, there will always be some 
chance that such subsidiary money will get to be different, 
in value from standard monev, with more or less disastrous 



64 CHAPTERS ON MONEY 

consequences. Thus the metal of which money of this sort 
is made might rise in vahie, till the coins became worth 
more as metal than their nominal value as coins. This 
condition would naturally cause money of this sort to be 
withdrawn from circulation and sold as bullion, thus depriv- 
ing the country of this very necessary form of currency. 
Precisely this happened in the United States about 1850. 
At that time in law both silver and gold had the status of 
standard money ; they were full legal tender and freely 
coined. But the new supplies of gold from California had 
cheapened gold, as compared with silver. Gold consequent- 
ly became the standard, as will be explained in Chapter V ; 
and silver half-dollars, quarters, and dimes commanded a 
premium of two or three cents on the dollar, and soon dis- 
appeared from circulation. How did we remedy the mat- 
ter? Simply by making these coins lighter. Instead of 
412.5 grains of silver to the dollar, we used 384 grains.* 
This made the silver in a dollar's worth of coins worth 
about q6 cents ; and. so. no one cared to melt them for the 
silver thev contained. This gives us the second character- 
istic of subsidiary money, shortness in 'ti'cighf, or being 
overrated. 

But. as in so many other cases, a device for meeting one 
difficulty creates new ones of its own. We steer away from 
Scylla only to strand upon Charybdis. If subsidiary money 
is made short in weight, what is to hinder its becoming less 
valuable than standard money and. as a consequence, ceas- 
ing to be current as money or, if remaining current, caus- 
ing endless trouble and risk or even usurping the place 
of standard money ? These are serious difficulties ; but the 
best ways of meeting them had been largely worked out in 
the experience of Great Britain before the United States 
made the change ; so that all we had to do was to employ 
the methods which had already proved efficacious. In_or^ 

* In 1853. 



THF, TYPICAL SYSTEM 65 

der to keep ow ^ subsidiary coins at par and, in doing so, to 
shut out the chance of their displacing standard money, the 
amount issued was strictly limited; and to insure this Hmi- 
tation they were issued only on account of the government, 
1. e. the mint stopped manufacturing these coins for private 
persons altogether. Still further to guard against the pos- 
sibility that this inferior money would usurp the place of 
standard money, its tender was limited to a comparatively 
small amount, which provision also insured individuals 
against the inconvenience of having excessive amounts of 
small money forced upon them. Finally, in 1871 and 1879, 
to perfect the system, placing parity beyond question and 
guarding individuals and communities against any possi- 
bilities of excessive stocks of this kind of money, we pro- 
vided for its redemption in lawful money at the treasury of 
the United States, just as if these coins were demand notes. 

We have, then, as the characteristics of a fully devel- 
oped subsidiary money ( I ) being composed of some metal 
inferior to the standard metal, (2) being short in weight 
or overrated, (3) having the status of universal legal ten- 
der, (4) having their legal tender limited as to amount, (5) [' 
l)eing issued in strictly limited amount, (6) being issued on\ 
government account only, and {j} being kept redeemable \ 
in lawful money at the pleasure'^'of the holder. J 

In the above account of subsidiary money, I have de- 
scribed the system existing in the United States at the pres- 
ent time. In one respect at least this system is not altogeth- 
er typical. Subsidiary money is not usually kept redeem- 
able. Further, recent experience seems to show that 
the fourth characteristic, limitation of legal tender, is 
not essential. In fact, of the seven characteristics named, 
three only seem really necessary, ( i ) made of inferior met- 
al, (2) overrated, and (3) limited in coinage. However, 
the more elaborate provisions of our system are doubtless 
a real gain as insuring results which would otherwise de-' 
pend on skillful management or good luck. 



66 CHAPTERS ON MONEY 

We are now prepared to understand the case of the 
fiat sik'cr, which was mentioned above as the second kind 
of circulation money and the consideration of which was 
postponed to this point. This money, when circulating as 
coin rather than in the form of certificates, must be viewed 
as in essence a subsidiary coin. It lacks indeed the fourth 
and seventh characteristics ; i. e. it is not a limited, but a 
full, legal tender and it is not redeemable. But after all it 
behaves as a regular subsidiary coin ; it remains quite sub- 
ordinate to standard money. We must add, however, that 
it can not be reckoned as a really satisfactory subsidiary 
money. As at present constituted, it constantly exposes 
our system to one serious danger. Not being redeemable, 
it is always liable to become less valuable than standard 
money ; and, in that case, being a full legal tender it would 
certainly drive out standard money and itself usurp the 
place. 

I In this account of fiat silver I have had in mind all the 
time the actual silver dollars. The certificates issued on the 
deposit of silver dollars present a peculiar case. As already 
explained on page 46, we do not, ordinarily, need to dis- 
tinguish between certificates and the coin which they rep- 
resent. In the case before us, however, this statement is 
not quite true. Silver dollars and silver certificates play 
quite different roles in our monetary system. Silver dol- 
lars, the coins, are a large-denomination subsidiary money. 
Silver certificates are a small denomination paper money. 
Further this difference effects quite important practical re- 
sults. The need of the country for silver dollars as a species 
of subsidiary money is quite limited, absorbing only about 
one-ninth of those issued. But the need for silver certifi- 
cates, as a small-denomination paper circulation money, is 
almost unlimited. Consequently, by circulating our silver 
money in both its coin and certificate forms, we manage 
to keep it all busy and out of mischief. 

The net result of this is to justify the statement that 



THIC 'l^'l'ICAl, S^■ST1•:M 67 

tliis kind of money is still more or less an anomaly, a fifth 
wheel. Doubtless it is not seriously wrong to divide our 
circulation mone\' into two sorts. (j_)_ bank notes and _(^2} 
subsidiary money and its certificatesT But this is sacrificing- 
precision to simplicity. A truer statement is that we have 
three circulation moneys ( i ) bank notes. ( 2 ) subsidiary 
coin, and (3) a mixed sort, fiat silver and its certificates. 
^As explained at the outset, this account of the differ- 
ent kinds of money is based more particularly on the sys- 
tem of the United States. It may be said, however, that it 
fairly covers the systems of most other leading industrial 
nations. Ours is peculiar chiefly in respect to greater varie- 
ty and complexity. The simplest system is that of Eng-\ 
land. Its moneys are (i) for standard money, gold coin, 

(2) for quasi-standard money, Bank of England notes, and 

(3) for circulation money, (a) country bank notes and (b) 
bronze and silver subsitliary coin. The systems of Conti- 
nental Europe are more like ours in that they have, in ad- 
dition to the moneys enumerated for England, a fiat silver 
circulation money ; but are more like the system of England 
in that, in so far as they can be said to have a quasi-stand-| 
ard monev. it is a bank note rather than a government note.' 



IV. THK DlFFKKKNT FUNDS OR DIVISIONS OF THE MONETARY 

STOCK. 

We have been considering the monetary stock as re- 
spects its composition, i. e. the several kinds of money which 
make it up, the nature and special function of each being 
explained. Another aspect of the monetary stock to which 
we must now give brief attention is its distribution into 
divisions or funds, these funds being determined according 
to the uses to which the money is being put or to the class 
of persons or institutions controlling it or perhaps merely 
to its geographical location. Thus it is natural in some 
connections to distinguish that portion of the stock which 



68 CHAPTERS ON MONEY 

is in the hands of the government from the part controlled 
by the general public, or again that portion which is used 
by the banks as reserve from the part in general circulation, 
or the stock in the chief money center from that of 
the rest of the country, and so on. I hardly need say 
that there are no hard and fast boundary lines between 
these different funds. One shades into another. Money 
is more or less freely passing from one into another. Still 
they can be, and for many purposes need to be, distin- 
guished. 

Looked at in the most general way the moneta ry stock 
divides into (i) Hoards, or money employed to store value 
and (2) the Effective Stock. By hoards we mean money 
which is set aside for an indefinite period from any employ- 
ment as a medium of exchange. Even in a country like the 
United States, the amount of money of which such disposi- 
tion is made is probably quite large. In times of panic its 
volume increases enormously and with serious consequences. 
Since, however, there is no way of ascertaining the pro- 
portion of the total stock put to this use, we can accomplish 
little by studying it. Hoards will therefore receive no 
further attention. 

The Effcctii'c Stocky is that portion of the money of the 
country which is employed, or at least is kept ready to be em- 
ployed, whether actively or passively, in furnishing the cir- 
culating medium of the community. It may be divided in 
a variety of ways. From the standpoint of function — the 
most important standpoint — we have ( i ) the Circulation 
Proper, and (2) the Rcscri'cs, sometimes called respectively 
tTie Active and Passive stocks. By the Circulation Proper 
we mean the money which is actually passing from person 
to person in payment for goods or in discharge of obliga- 
tions, or is being held ready to be given such employment 
in the immediate future. Of the circulation proper a con- 
siderable portion is in the pockets or houses of individuals. 
A more important part is the till-money of the merchant or 



THE TYl'lCAI, SYSTEM 69 

manufacturer, — the fund of actual cash kept on hand for 
niakin.^: change or efifecting- minor cash payments, — a fund 
which is as necessary a part of a husiness man's stock in 
trade as are scales, showcases, wrapping paper, twine, and 
so on. The part of the circulation proper which consists of 
the two funds just described is often distinguished from 
the rest by calling it the Outside Circulation, i. e., the cir- 
culation outside the banks and the Treasury.* 

But this must not be thought of as the whole of the 
Circulation Proper. That division includes as well a part 
of the money held by the banks and the United States treas- 
ury. Thus, while bank holdings in large measure belong to 
the reserve division of the monetary stock, a portion of 
them is true circulation. That portion is the fund of free 
money — till money — which the bank, like the business 
house, keeps to meet everyday calls. It is the fund into 
which and out of which money is flowing all during busi- 
ness hours. It often consists in considerable measure of 
money which can not from its nature be counted as reserve, 
e. g. a bank's own notes. In like manner a portion of the 
Treasury's holdings must be thought of as a part of the cir- 
culation. For, while several hundred millions of the money 
in the hands of the Treasury are trust funds and reserves, 
that institution is obliged to have as well a working bal- 
ance — a till fund — out of which and into which money is 
all the time flowing, just as it is all the time flowing out of, 
and into, the till fund of the banker or merchant. Such 
money is, then, very actively employed and so is most em- 
phatically /;/ circulation. Accordingly the Circulation^ 
Proper includes the outside circulation, the banking till 
Tund. and the Treasury balance ; and at times it is convenient 
to distinguish all of these. Commonly, however, the public 
blends the second of these divisions — the banking till fund — 
with the other funds of banks under the head of bank hold- 
ings. 



* This phrase is also used for all the money outside the Treas- 
ury. 



70 CHAPTERS ON MONEY 

Having disposed of the circulation proper, we come now 
to the Reserves. In a general way, these may be described, 
as funds set aside to perform certain necessary fnnctioiis 
growing" out of the existence of credit and credit substi- 
tutes for money. First, we have the Required Baiikiiii^ Re- 
serve. Its office in guaranteeing and meeting the liabilities 
of banks to their depositors has already been brought out 
in Chapter I. Tn this country the amount of this reserve, 
as measured in deposit liabilities, is commonly fixed by 
law at from 15. to 25 per cent of those liabilities. Hence 
this fund is known as the Required P>anking reserve. In 
other countries it is not usual to prescribe the reserve by 
law. but ]irudent banking furnishes a rule almost as bind- 
ing, though less definite. In New York City, the clearing 
house association requires all its members to keep the 
amoimt of reserve prescribed for national banks. 

The second banking reserve which we distinguish, we 
shall call the Ultimate Banking Reseiye. It is really a por- 
tion of the total required banking reserve of the country ; 
but it plays so important a part that it needs to be distin- 
guished from the rest and given a special name. Its exist- 
ence is to be explained as follows. For various reasons it 
is natural, almost necessary, that banks located anywhere 
outside the chief commercial center of the country should 
each keep money on deposit in some bank in that center, as 
also in some bank in each of two or three other cities which 
occupy toward the place where the first named bank is lo- 
cated the position of trade centers. But, secondly, it is also 
quite natural that each of these outside banks should wish to 
count as a part of its required reserve the balances kept with 
its correspondents in the other places ; and such a practice is 
generally pursued, particularly in England and the United 
States : — in the latter case, it being specially authorized by 
law under definite conditions. As a result the banking re- 
serve of a great center like New York can not be thought of 
as merely its own reserve. It is also a reserve for those 



THK TVl'ICAI. SYSTEM ?! 

banks all over the country which arc keepino^ part of their 
reserves in New York and also for those still smaller banks 
which are keepint^ a part of their reserves in the banks 
which are keeping^ their reserves in New York. In short, the 
reserve of the banks of New York is in no small measure 
the reserve of the United States as a whole.* It thus results 
that the banking reserve of the central city of any country 
comes to constitute the ultimate foundation of the banking 
credit of the whole country ; and as such it deserves a special 
designation, the ultimate banking reserve. 

A third banking reserve which needs to be distinguished, 
especially for a great commercial center like New York, is 
the Surplus Reserr'e. This is the amount of lawful money 
held bv a tank in excess of the reserve required by law or 
sound banking practice. This surplus reserve is that por- 
tion of the money holdings' "b rbank s which furnishes a basis 
"^"for loans. In other words, in sd far as the lending power 
"of the community depends on the banks, — and this is al- 
most wdiolly the case, — that power is limited largely by 
the size of the surplus reserve. If the borrower insists upon 
cash, this is taken from the surplus. If, as suits the bank 
better, the borrower accepts credit on the books of the bank, 
in other words, becomes a depositor to the amount of the 
proceeds of his loan, then an amount equal to from 15 to 
25 per cent of the new deposit must be deducted from the 
surplus reserve and credited to the required reserve. 

Since the amount of the surplus reserve largely deter- 
mines the loan power of the banks and therefore their ca- 
pacity to support business and speculation, the business com- 
munity in a great center like New York watches with eager 
interest the changes in the total surplus reserve of the city 
banks, as these are reported each Saturday morning. This 
total will in sfood times range from twenty millions down 



* In England this practice is carried still further, the banks of 
London largely keeping their reserves in one London bank, 1. e. 
the Bank of England. 



72 CHAPTERS ON MONEY 

to nothing or even less than nothing. Generally speaking, 
the better the times the smaller the surplus res erve ; for 
goo3~Times mean the employment of all the money capital 
in productive enterprises and therefore mean much bor- 
rowing from the banks. This statement, however, must be 
qualified by the remark that over-eager speculation may 
absorb all the floating capital without necessarily meaning 
general prosperity. On the other hand, an excessively large 
surplus reserve, say, from seventy-five to one hundred mil- 
lions, usually indicates commercial depression ; for it means 
that business men are not borrowing, which in turn means 
that they are not carrying on a normal amount of business. 

The three reserves thus far studied; viz. the required 
banking reserve, the ultimate banking reserve, and the sur- 
plus banking reserve, have to do more especially with the 
maintenance of credit in connection with the business of 
borrowing and lending money. The three which remain 
to be considered have functions even more vital in a mone- 
tary system. As already explained earlier in this chapter, 
hvo of the several kinds of money, viz. standard and quasi- 
standard money, are really used not so much to do money 
work themselves as to keep the rest of the money in shape 
to do that work. In particular, it is their business to keep 
at par all inferior money and to maintain the standard mon- 
ey in its place. Now. the particular portions of the stock 
of the moneys named on which these duties fall are the three 
reserves here under consideration, which, therefore, might 
be called the systemic rcscn'cs. 

First among these reserves, making the fourth in the en- 
tire series, there is the bank_jiote resoye which the note- 
issuing banks are obligecTto keep in the Federal treasury to 
redeem their notes. This reserve consists of a fund^fjaw,- 
ful moncv c(|ual in ani(~)unt to fiveper cent of the bank cir- 
culatinn. From it the Treasury redeems all notes presented 
and so insures their parity . A second fund of this sort 
which, theoretically at least, needs to be distinguished con- 



THE TYPICAL SYSTEM 73 

sists of lawful money in the general fund of the Federal 
treasury which is to be thought of as held in reserve for 
the redemption of subsidiary coin, which, therefore, we will 
call the subsidiary coin rescr-c'C. 

But tTie most important of these systemic reserves con- 
sists of a fund of $150,000,000 in gold set apart in the 
Treasury for the sole purpose of redeeming legal tender 
treasury notes. This treasury no/g ^^ reserve i s that portion 
of our stock of standard money which is more especially 
devoted to those tasks which, as we learned earlier in this 
chapter, constitute the most important functions of stand-* 
ard money, viz., (i) maintaining the parity of inferior \ 
moneys and (2) maintaining standard money in its placed 
This particular reserve is, indeed, devoted to maintaining 
the parity of only one of the inferior moneys, i. e. legal 
tender treasury notes. But, since most other inferior mon- 
eys are kept equal to those treasury notes, they as well as 
the treasury notes are by the process kept equal to gold. 

But not only does this 150 million treasury reserve in the 
last issue maintain the parity of inferior moneys, it also, 
in doing this, maintains standard money in its place. For, 
some of these inferior moneys being full legal tender, they 
would, if not kept equal to standard money, drive it out 
and the cheapest of them would take its place. I hardly 
need to say, then, that the treasury-note reserve is an ele- 
ment in the monetary system of the utmost significance. 
In a very important sense it is the foundation on which the 
whole system rests. It may quite properly be designated 
the Ultimate Rc^s^rve. For, while bank credit, bank notes, 
and subsidiary money proximately rest on the lesser re- 
serves ; ultiinatch' they and the legal tender notes all rest 
on the treasury gold reserve. 

In the United States the ultimate reserve is kept by the 
Federal tre asury; since this institution issues the principal 
credit money, legal tender notes. In most other countries,, 
the ultimate reserve is kept by some one bank which holds 



74 CHAPTERS ON MONEY 

a preeminent position, being allowed to issue notes which 
alone are legal tender or have some other prerogatives mak- 
ing them superior to other bank notes. In such case, this 
reserve is identical with the second reserve explained on 
page 70, and designated the ultimate banking reserve. For, 
where the ultimate reserve is kept by a central bank, that 
reserve is used both to redeem its notes, thus maintaining 
the parity of inferior moneys, and also to pay depositors, 
thus maintaining deposit credit. 

J, PROBLEMS. 

}^' I. How does the amount of silver in an English mon- 
ey pound compare with the amount in a weight pound? 
(A pound of silver is now coined into 66 shillings.) 

2. Answer the same question for the Scotch money 
pound of the 17th century. ( See Century dictionary. ) 

3. What is the money unit of Russia? Japan? the 
Philippines ? Argentina ? Chili ? ( See Mint Report for 
1900. pp. 480-517). 

4. What is the value of the English unit computed in 
American money? in French money? in German money? 
(For the amount of gold in the different units see Mint 
Report for 1900, pp. 480-517.) 

5. What is the value of the American unit computed in 
French money? in German money? in Italian money? 

6. What is the value of the American unit computed 
in the money of Argentina, which has a paper money stand- 
ard? Is that a reasonable question? 

7. Suppose we were to change our standard of liquid 
measure from 8.33 pounds of water to 8.33 pounds of sul- 
phuric acid, which has almost twice the specific gravity of 
water, what would be the result to our gallon? 

8. Suppose we should decide to put into our gold coins 
12.9 grains per dollar instead of 25.8 grains. What would 
naturally be the result to pur dollar? 



THK TV1'ICAI< SYSTEM 75 

9. The English sovereij2^n contains \22^.2'j ,2;rains of 
standard i^old. What is the Eni^lish mint price of an onnce 
of standard gold ? 

10. The German mark contains 5.5+ grains fine gold. 
What is the German mint price of fine gold? 

11. Mexico has a silver standard.* If silver should 
rise in value 10 per cent, would the Mexican dollar rise in 
value?* Would it rise in price? Would the price of silver 
hullion in iMexico rise? . Explain. 

12. In the United States in i860, gold coin was worth 
$1.00; silver, $1.03; most bank notes, $.98 or $.99. Which 

was standard money? What was the ultimate standard ?a^m^V fiU^^i 
Explain. 

13. How much silver of standard fineness is there in 
two half-dollars? four quarter-dollars? ten dimes? 

14. How many grains of pure silver are there in a 
standard silver dollar? How many grains of standard sil- 
ver? What does the word standard mean in this use? 

15. It is said that between 1834 and 1853, when the/? 
United States had legal bimetallism at a ratio of 16 to i,*, 
promissory notes and other money contracts were occas- 
ionally made payable in silver dollars of standard weight 
and fineness. What was the ultimate standard of such con- 
tracts? What do you suppose was the cause of this prac- 
tice? 

16. "Silver dollars are just as much legal tender as 
gold. I don't see then why we can't say that they are just 
as much standard money as gold." Where is the mistake? 

17. In May of 1905 Mexico stopped the free coinage 
of silver. Suppose that now she should continue to use 
silver as her standard money but should keep a dollar's 
worth of exchange on New York at a price of 2 pesos. 
What would then be her real ultimate standard? Explain, 

18. October i, 1891, Farmer A borrowed from the 



* No longer true, 1906. 



76 CHAPTERS ON MONEY 

Ann Arbor Savings Bank $1,700 payable four years from 
date on the multiple standard plan. On October i, 1891, 
a unit of the standard was rated at $13.25 ; while on October 
I, 1895. it was rated at $12.75. For how many multiple 
units must the note have been drawn up? What amount of 
money was needed to pay the principal when due? Con- 
sult Walker's Political Economy, pp. 370-375. 

19. In the United States in 1840 the price of standard 
gold was $i8.6o-|- per ounce. By 1855 its value had fallen 
say, three per cent. What must its price have been at the 
latter date? - ' ■ -^^-^-. a^ ' ^'^'^ 

20. "I can not understand what people mean when 
r. they say that money has risen in value since 1873. Money 

/ is by common consent the measure of the values of all other 
' things ; and, therefore, its own value must be fixed, can not 

rise or fall." From an advocate of gold in the campaign 

of 1896. Explain fallacy. 

21. A gold five-dollar coin will buy 80 pounds of 
sugar. The same coin melted into a lump will buy 80 
pounds of sugar. Five silver dollars will buy 80 pounds of 
sugar. The same silver melted into a lump will not buy 
40 pounds of sugar. What is the significance of these facts 
as bearing on a controversy as to whether gold or silver 
actually is our standard ? 

22. What do I mean by saying that in 1895 I"tlia really 
had a silver coin standard? 

23. During the Civil War when most of the country 
was on a paper money basis, the people of California suc- 
ceeded in inainfainins: the o-old standard, chieflv by resort- 
ing quite generally to the practice of making all contracts 
payable in gold. What is meant by the phrases in italics? 

24. From an editor in 1895 : "I have a friend who is 
a farmer. He ozves no man a dollar. But, because of the 
appreciation of gold, his farm, which ten years ago was 
worth $10,000, is today worth only $8,000. Thus the con- 
tinued maintenance of the gold standard has robbed him of 



THE TYPICAI. SYSTEM 77 

$2,000." Supposing the facts to be as stated, is the farmer 
any poorer than he was? 

25. In 1873 the market price of standard gold in the 
United States was about $21.02. By 1896 its vakie had 
risen, say, forty per cent. What was its price at the latter 
date? <i-^??-0'"''^— '^^-^ ^ ^^Z3 

26. ''Legal tender money is money the offer or tender 
of which in payment of a debt constitutes under the law a 
discharge of the obligation." Is that correct? //See some 
law dictionary. 

2^. Could I pay a debt of $500 with silver dollars ?M 
with twenty-five cent pieces ?/[/ with national bank notes? 

28. What is the brassage on our gold coins? See Mint 
Report for 1900, page 515. 

29. What is the seigniorage on our fractional silver 
when standard silver bullion is worth 60 cents an ounce? 

30. If we had the free coinage of silver with the dollar 
of the present weight and fineness, what would be the mint 
price of an ounce of fine silver? of standard silver? 

31. If we follow the usage of this book, can we at the 
present time properly call greenbacks fiat money? 

32. The five-franc piece of the Latin Union and the 
silver thaler of Germany are both fiat coins. What then 
must be true of them? '-' ' • '- 

-i^T^. What in our day are the two chief legal charac- 
teristics of standard money?-' /Au. ^i«x^ 

34. Show that in a very important sense we demone- 
tized silver in 1873, although we only discontinued the free 
coinage of silver dollars. 

35. The mint report for 1900 on page 498 says: "In 
brief, therefore, the Latin Union has the double standard 
(bimetallism) etc," yet on the same page is to be found 
conclusive proof that the Latin Union no more has the dou- 
ble standard than has the United States. What is that 
proof ? 

36. If we should discontinue the free coining of gold, 



? 



78 CHAPTERS ON MONEY 

SO that the exchange vakie of gold coin came to be ten 
cents greater than that of the bulHon in it, what would 
then be our standard money? Our ultimate standard? 

jt,y. It occasionally happens that bankers who deal in 
international exchange will accept the bank notes of other 
nations to a limited extent. Thus, Liverpool bankers will 
accept our bank notes from steamship ofificers, though they 
will not accept Canadian bank notes. What use can they 
make of our notes which makes them ready to accept those 
notes ? 

38. In Germany there is one great Imperial bank and 
several smaller ones of a local character all of which issue 
notes. None of these notes by whatever bank issued are 
legal tender, and yet the notes of the Imperial Bank seem 
to form a quasi-standard money. Can you imagine an ex- 
planation ? 

30- Copy the reading matter on the front and back of 
a national bank note ; a silver certificate ; a treasury note. 

40. "Silver half-dollars, quarters, and dimes should be 
thought of as, so to speak, mere metallic treasury notes." 
Explain. • ' ;• 

41. Why do we say that a particular metal is oi'er- 
rafcd by the mint when the coins made of that metal are 
debased or short in weight? 

42. England does not, like the United States, provide 
for the redemption by the government of subsidiary and 
token money. Do you see any advantage or advantages in 
our plan? See Jevons' Money and the Mechanism of Ex- 
change, p. 119. 

43. September 7, 1899, the reported reserve of the 
national banks of the United States was $890,500,000, 
though the actual cash held was only $466,400,000. How 
do you explain this apparent discrepancy ? 

44. In February of 1894 the surplus reserves of New 
"^'ork, reached $111,000,000, though in ordinary times they 
range from two or three to twenty-five or thirty millions. 



THE TYPICAL SYSTEM 79 

How do you explain the extraordinary size of this fund in 
1894? -'h"^ V^^.^^^ 

45. If our Federal treasury should retire finally all its 
outstanding notes, on what institutions would the maintain- 
ing of the ultimate standard reserve probably fall? Why? 

46. Make a statement showing the amount of each of 
the difit'erent kinds of money in the United States at some 
recent date. (You can get the facts from the last report 
of the Secretary of the Treasury or the last Statistical Ab- 
stract ) . 

47. Make a statement showing the circulation of sil- 
ver dollars (coin) for every fifth year beginning with 1880 
and coming down to 1905. Same for silver certificates. 
Do you see any significance in the facts? 

(Same sources as before). 

48. ^lake a statement showing the amount of the total 
reserve and the surplus reserves of the New York banks, 
together with the rate of discount on call loans, as reported 
each Saturday, for the months of August and September 
last. Have the facts any significance? 

(You can get the information from the Commercial and 
Financial Chronicle or any Sunday newspaper). 

49. Make a statement showing the movements of mon- 
ey between the New York banks and the Interior and be- 
tween the New York banks and the Sub-treasury for each 
week of the months of August and September last. 

(Commercial and Financial Chronicle, opening article 
on the Financial Situation, at the end). 

50. Until within a few years the United States treasury 
in computing our monetary circulation was accustomed to 
count both the gold and silver certificates in use and the 
coin held in the Treasury to redeem those certificates. Was 
that reasonable? Explain. 



CHAPTER III. 

MONETARY PRINCIPLES— THE NATURAL LAWS 

OF CIRCULATION. 

We have now before us a fairly complete idea of the 
typical monetary system. We must next take up the prin- 
ciples, or natural laws, regulating monetary phenomena. 
For of course monetary phenomena are governed by natural 
laws quite as truly as the phenomena with which botany or 
chemistry or physics is concerned. Doubtless we must ad- 
mit that, in the form of statement which is found most con- 
venient, these laws are less rigid and universal than those 
of the physical sciences ; but, generally speaking, they are 
no less real and no less important. Thus governments can 
no more drive a particular money out of circulation or keep 
it in some particular part of the circulation or make a par- 
ticular metal the monetary standard, by merely decreeing 
such a result, than they can bridge the Detroit river by that 
process. But any one of these objects, as also any one of 
numberless other objects which might be suggested, gov- 
ernments can easily accomplish, if only they will use the 
proper means ; that is, if they will establish such conditions 
that the natural laws which govern the matters in question 
will themselves work out the results desired. 

The first group of monetary principles which we will 
study consists of those which are concerned directly or in- 
directly with the capacity of money to circulate, i. e. to 
constitute a part of the monetary stock. Will a particular 
money circulate at all? In what part of the field will it 
have most complete circulation? Of two moneys which 
will show itself more tenacious in circulation? What char- 
acter will be given to the monetary stock as a whole or to 



PRINCIPI^ES OF CIRCUI.ATION 8l 

any particular part of it because of the peculiarities of 
different moneys as respects capacity to circulate? These 
are some of the questions we must now try to answer. 

I. GENERAL CONDITIONS. 

We begin with the general conditions which regulate 
capacity to circulate. First, it is plain that these conditions 
can all be included under one or the other of two classes, 
( I ) those which determine how much tendency to get into 
circulation a money will have and (2) those which deter- 
mine how much tendency to get out of circulation it will 
have. Every force or condition which strengthens the hold 
of a money on the circulation must do so by increasing its 
pendency to get in, or diminishing its tendency to get out,- 
or both. On the other hand, every condition which weakens 
the hold of a money on the circulation must do so by di- 
minishing its capacity or tendency to get into circulation, 
or increasing its tendency to get out, or both. 

But what now are the conditions which determine the 
strength of these two opposing tendencies, the tendency to 
get into circulation and the tendency to get out of circula- 
tion ? The processes by which a money gets into circulation, 
omitting the mere exchange of one kind of money for an- 
other, are three; (i) being exchanged for goods, (2) being 
paid to creditors, and (3) being loaned to borrowers. Now 
any one of these processes plainly involves action on the 
part of each of tzvo persons, the issuer of the money and the 
receiver of the money. The former must pay it out, the lat- 
ter must accept it. It follows, then, that the tendency of 
a money to get into circulation depends on the conditions 
which determine whether the issuer can and zvill pay it out 
as a buyer or a debtor or a lender, and whether, on the 
other hand, sellers or creditors or borrowers will accept it. 
As far as paying out by the issuer is concerned, this need 
not long delay us. The issuer must gain something by is- 



82 CHAPTERS ON MONEY 

suing and he must have opportunities to issue. Gaining 
something is usually assured the issuer unless in the case of 
paper money the conditions of issue are so elaborate as to 
offset the profit. Opportunities come most frequently to 
those who have large dealings with the public as buyers, 
debtors or lenders. This is plainly more likely to be the 
case with governments, or with banks, than with manufac- 
turers or farmers. Accordingly the notes of governments 
or banks have much more tendency to get into circulation 
than would those of manufacturers or farmers. 

But, as said above, getting money into circulation re- 
quires not only paying out by the issuer but also acceptance 
by the person receiving. How is this secured ? Acceptance 
may be either compulsory or voluntary. In the case of a 
particular money, some persons at least may be in such a 
position that they have no choice but to accept it whenever 
offered. With other moneys, on the other hand, entire de- 
pendence may be placed on the voluntary action of receivers. 
Where resort is had to compulsion, it is common to make 
creditors of the issuer accept the money in full settlement 
of their claims. In extreme cases, even sellers of goods are 
compelled to give up their goods to the issuer and accept 
his money in exchange. Manifestly a money having these 
prerogatives can more easily get int® circulation than one 
without them. 

But it is not always good policy to make the acceptance 
of money compulsory. Further, even if this element comes 
into the case, it is also desirable that the money be able 
to get into circulation because voluntarily accepted by sell- 
ers and creditors ; that is, a money should have the property 
of voluntary acceptability. How is this secured? What 
leads a person to accept a particular money when the issue 
is clearly drawn, when he is acting in the matter with full 
consciousness? In the first instance, undoubtedly, the ac- 
ceptor is determined by the belief that he can later pass the 
money to others, that he can use it to buy goods or pay 



PRINCIPLES OF ClRCUIvATlON 83 

debts.''' For, generally speaking-, no one accepts money for 
any other purpose than in turn to use it as money. We may 
confidently say, then, that the primary basis of voluntary ac- 
ceptability for any money is the belief of the receiver that 
he will be able to make of such money a monetary use. 

But every person, in accepting a money with the expec- 
tation that he will be able to use it as money, must recognize 
the possibility that he will prove mistaken, that, between the 
time he receives it and the time he wishes to use it, its 
power to pass will have been lost. How is it that this pos- 
sibility does not lead him to refuse it altogether? Doubt- 
less, he at times takes his chances, driven by a sort of moral 
compulsion to be remarked on later. But, generally speak- 
ing, the acceptor demands in the background a sort of col- 
lateral security. He wants in the money he accepts an ele- 
nient which insures to him a satisfactory alternative if it 
proves unsatisfactory as money. Thus, it may contain bul- 
lion worth as mere metal the full face value of the coin, or 
it may be a promise to pay which is convertible on demand 
into full weight metallic money, and so on. This leads us 
to affirm that the secondary ground of the acceptability of 
money is the assurance that in case it should cease to be 
usable for monetary purposes, some other satisfactory dis-_ 
position of it will be available to the holder. 

We have run over the conditions determining the ten- 
dency of money to get into circulation. We must now take 
up those which regulate the tendency to get out. Broadly 
speaking, money gets out of circulation in either of two 
ways. It is driven out or it is drmvn out. In the first case, 
the ^public object to it as money and put it out. In the sec- 
ond, people wish to make of it some non-monetary use and 
withdraw it from circulation. In the first case it is usually 
too bad to stay in ; in the second, too good. Driving a 



* At this point, voluntary acceptability is created by compulsory 
acceptability. The fact that a given money is a valid tender makes 
people li'illiug to receive it, siace they can use it to pay debts at least. 



84 CHAPTEJiS ON MONEY 

money out of circulation may take either of two forms, 
"stalling" and "return to the issuer."' A money is put out 
by "stalling'' when it ceases to pass simply because people 
generally refuse to accept it in exchange for goods or dis- 
charge of obligations — the last acceptor finds the money on 
his hands useless for any monetary purpose. Such was 
the fate of the Continental currency of our Revolutionary 
War, also that of the Confederate currency of our Civil 
War. "Return to the issuer," as a method of putting a 
money out of circulation, applies only to credit money, and 
best to bank notes. Such money is out of circulation when 
in the hands of the issuer, since he can not count it as the 
eqnk'alcnt of real money as other persons c an. For other 
persons can require him to redeem the notes in real money, 
or its equivalent, and so can use those notes to get such 
real money if preferred to the notes. The issuer, however, 
has no such means for transforming notes into real money. 

Driving a money out by "stalling" is quite rare and 
need not delay us. Plainly it is not easy of application in 
the case of a money which has the status of legal tender. 
Though such a money has been stalled by a resort to the 
general use of special contracts setting up another standard 
for debts. This was the case with greenbacks in California. 
Whether a money not a legal tender is likely to be driven 
out in this way obviously depends on the public readiness 
to receive it. Before it can be put out, its acceptability must 
have been completely lost. But in this we have no new prob- 
lem, since the conditions of acceptability have already been 
commented upon. 

W'Q pass on to the case of "return to the issuer," a meth- 
od of expulsion which, as already noted, is applicable only 
to credit money and most to bank notes. What conditions 
regulate the tendency of a money to get out by this process? 
Plainly the holder must have a motive for sending such 
money home and must not be hindered from doing so by 
ol stacles which make the operation seriously troublesome 



PRINCIPLES OF CIRCULATION 85 

or expensive. Motive is determined chiefly by the capacity 
of the money to do money work. If the holder can use it 
for every kind of money work, he will not care to get it 
redeemed in any other kind of money. If, on the other 
hand, he can not use it to make some particular kind of 
payments which he is often called on to make, e. g. duties 
on imports, or for some other important purpose, e. g. mak- 
ing up bank reserves, he will naturally hasten to return it 
to the issuer to be exchanged for better money.* As re- 
spects eliiiiijiatiiig obstacles to such returning of notes, this 
depends chiefly on having suitable redemption machinery, 
both local and central. If a note-holder is in Boston and 
the issuing bank is located in Butte, Montana, and the note 
holder has no way of securing redemption except to send 
the note from Boston to Butte and bring back the money at 
his own expense, there is not likely to be a great deal of 
such sending done. But, if every national bank must accept 
(still better redeem) the notes of every other, and if at 
every important center there is some agency to redeem the 
notes of every bank at the expense of the issuer, the sending 
in of notes will be frequent, provided there is any motive 
for doing so. 

We have learned the general conditions determining the 
tendency of moneys to get out of circulation by being driven 
out. A word now with respect to the conditions which reg- 
ulate the tendency to go out by being zmthdraivn. The pro- 
cesses by which withdrawal takes place are chiefly these, 
(i) recoinage, (2) hoarding, (3) exporting, (4) melting, 
and (5) marketing. Of these the first obviously applies 
only to coin and that to inferior coins. Under ordinary condi- 
tions it takes out a comparatively small amount of money. 
The processes remaining attack chiefly the better part of 
the currency. Thus it is evident that a person of sound 
judgment who wants money to hoard will naturally choose 



* Motive to return also depends on the profitableness of issue. 



86 CHAPTERS ON MONEY 

the superior money, unless its superiority is likely to dis- 
appear ; for, by choosing' the best, nothing is lost and some- 
thins mav be gained. Thus, one who hoards silver dollars 
or bank notes the value of which is largely conventional, 
takes the risk that something may happen during the period 
of hoarding to destroy the fictitious element in their value, 
while with full-weight gold money he avoids this danger 
altogether. Quite similar reasoning applies to bank re- 
serves. Since banks must in any case keep large sums idle, 
they may just as well choose for the purpose money which 
is of the highest grade, and hence not liable to involve them 
in anv loss. Accordingly, it seems safe to say that, gen- 
erally speaking, a bettermonev, one of higher value — ac- 
tually or prospectively — is more likely to be withdrawn from 
circulation by hoarding, than a poorer money. 
'^ Substantially the same point as that just made with re- 
spect to hoarding can be made in the case of welting also. 
Better money — meanmg here money having greater bullion 
v'iTue^is more likely to be withdrawn from circulation by 
iTTeltTng'Than poorer money. A gold eagle containing 258 
grains is more likely to be melted than one containing 257 
grains, since as a lump of metal it is worth about 4 cents 
more. Oirrratcd moneys simply icill not he withdrawn at 
all No one can afford to change a silver dollar worth 100 
cents into a lump of silver worth little more than 40 cents. 

The case of withdrawal by export is in no material re- 
spect different, though the argument is not just the same. 
As we learned earlier, in dealings between nations, money 
is accepted only by weight ; so that any deficiency in the 
metallic value of a coin below its exchange value at home 
will mean just so much loss to the exporter. Exporters, 
therefore, naturally select those coins which come nearest 
to being full weight ; and, like the person who melts coin 
for the metal in it, they can not use overrated coins at all. 

The last process of withdrawal, i. e., "marketing," ought, 
perhaps, to have been treated as already covered by melt- 



PRINCIPI.ES OF CIRCULATION 87 

ing or exporting or both. I mean by marketing turning the 
money into a commodity, treating it hke wheat or copper 
or oil, selling it to some one for some other current money. 
Thus, when in the early part of our Civil War gold money 
liad gone to a considerable premium in the United States, 
it very generally ceased to be treated as money, being sold 
to some one wanting gold, or stored for future sale. Mani- 
festly the likelihood that this operation will take place is 
increased or diminished as the market value of the given 
money increases or diminishes. If at a certain time during 
the Civil War the gold premium had been 2 per cent, the 
likelihood that gold would be withdrawn from cir- 
culation and sold like wheat or cotton would have been 
much less than when the premium was 15 per cent. In 
this case, then, as in the preceding ones, better money is 
more likely to be withdrawn than poorer money. Indeed, 
it ought perhaps to be added that no money which is not 
so good as to be better than par will be withdrawn by this 
method. 

II. PRINCIPLES. 

The preceding discussion has furnished us with the 
general conditions upon which the capacity of a money to 
circulate depends. On the basis of this analysis we are now 
prepared to set forth in more formal shape the more im- 
portant laws or principles which, working through the condi- 
tions already brought out, regulate the currency of moneys. 

Principle i. Under modern conditions in most civilized 
countries the full and continuous circulation of any kind 
of money in any particular country commonly requires a 
measure of legal authorisation from the government of that 
country. ~ 

The most decisive proof of this principle is to be found 
in the fact that, save in exceptional cases, the_currency of 
a money is limited to the country, or perhaps the district, 
where it is legally authorized. Even when nations are side 



88 chapte;rs on moni:y 

by side geographically, are very closely connected in indus- 
trial and commercial affairs, and use the same monetary 
standard and even the same denominations, there is usually 
no reciprocal use of each others' money, save along the bor- 
der, unless such use is officially authorized by treaty or 
statute. Thus, the United States and Canada have both 
the same standard, 25.8 grains of gold, the same current de- 
nominations, dollars, half-dollars, quarter dollars, etc., and 
they are closely related in commerce and industry generally ; 
yet Canadian coin has no currency in the United States out- 
side the border cities. In like manner Canadian bank notes 
which are among the best in the world, are amply secured 
by a safety-fund, and are redeemable not in government 
paper, like ours, but in gold, have after all no currency in 
the United States, outside of Detroit, Bufifalo, and a few 
similarly situated places.* 

Now, I hardly need add that this connection between 
currency and legal authorization is no mere accident. It 
is the most natural thing in the world that people should 
be slow to accept any money which lacks legal authoriza- 
tion. For even a small measure of governmental recogni- 
tion furnishes for any money a sort of governmental guar- 
antee, which is found to have weight with all men, more 
especially with the masses of men. In the first place, gov- 
ernment authorization of any sort creates a presumption 
that the money is a good one, issued under conditions which 
insure its goodness. Governments nowadays feel a high 
degree of responsibility with respect to the circulating me- 
dium. The presumption is that they have so safeguarded 
the processes of manufacture and issue, that any money 
put in circulation by their authority will prove good, and 
that they are taking such effective measure against counter- 
feiting that any money which seems to have been issued by 
their authority reallv was so issued. 



* Apparently there is more use of United States money in Can- 
ada, than of Canadian money in the United States. 



PRINCIPLES OF CIRCULATION 89 

But, in the second place, while this presumption of good-^ 
ness is fairly strong for a money purporting to have been 
issued by the authority of any government, it is much 
stronger if such money claims to have been issued by the 
government of the very country where it is offered in ex- 
change. Naturally the American will have greatest faith 
in the American government, the Englishman in the Brit- 
ish government, and so on. Further each is likely to know 
the system of his own country and its quality is a matter 
of certainty, while that of an alien government suffers, in 
our estimate, from all the doubts which we attach to 
the unknown. Further, the government of any country al- 
ways provides for the rigorous suppression of counterfeit- 
ing as regards its own moneys ; but it gives little attention 
to safeguarding the moneys of other nations. It is perfect- 
ly natural, then, that the circulation of any particular mon- 
ey should be limited to that country the government of 
which furnishes the authority for its issue. While money 
often gets into circulation outside the country where it is 
legally recognized, it soon falls into the hands of bankers 
or dealers in exchange and is by them returned to the coun- 
try of its issue either for collection or to cover drafts drawn 
on that country. 

Principle 2. Under modern conditions representative 
money zchicli is not redeemable, directly or indirectly, in 
either standard money or goods^ seems generally to require, 
as a condition of currency, that it should he a valid tender 
in some important relation, e. g., payments to government. 

It has already been made out in Principle i^that somg 
de gree of legal author ization seems necessary to the cur- 
rgn cy of a mone y. The principle before us goes further and 
affirms that in certain cases the currency of a money requires 
that it should have the status of a valid tender in some im- 
portant sort of payment. Thus, it is difficult to believe that 
fractional silver, when not redeemable, would have cur- 
rency, if it were deprived of the prerogative of being a 



90 CHAPTERS ON MONEY 

universal legal tender for small sums, or at least a legal 
tender in payments to government. Similarly, it is almost 
impossible to believe that the irredeemable treasury notes 
issued during the Civil War would have gained and kept 
currency, if they had not been a legal tender among private 
persons, or between government and the public. 

To prove conclusively a proposition such as the above 
is, of course, impossible, but there is obviously a strong 
theoretical presumption in its favor, and pretty decisive con- 
firmation from experience is available. Such confirmation 
is to be found in the fact that in repeated instances govern- 
ments have found it easy to expel an obnoxious money from 
circulation by depriving it of all legal tender status, i. e., 
relieving creditors of the obligation to receive it in payment 
of debts, and refusing to accept it for public dues. Thus, 
within the last few years the government of the United 
States has very largely gotten rid of Spanish and Mexican 
coin in the Philippines by this method of procedure. 

Principle 3. Standard coins ivhich fall much short of 
lcs:al rcqnirementsHrFfspcct to weight linll not commonly 
remain in circulation unless, though short in weight, they 
continnc to he a valid tender in some important relatiori, 
particularly in payments to government. 

This principle is fairly well established by the exper- 
ience of European governments. Prior to the eighteenth 
centurv, the metallic currencies of most European states 
were almost incredibly bad. Sweating, filling, clipping, and 
other devices for stealing metal from the coinage were con- 
stantly practiced, and with such efficiency that, when in 1695 
an investigation was made by the English exchequer, a 
quantity of coin which ought to have weighed 220,000 
ounces actually weighed 114,000 ounces. As a matter of 
course governments had not been indififerent to such a 
condition of things. Laws punishing with Draconian se- 
verity all mutilating of the currency had long been in force. 
But they had proved of little, or no, avail. Finally, the 



rRiNCiPi^KS oi^ ciRcni<ATiON 91 

very simple plan was adopted of taking from short weight 
coins the right to be forced upon creditors or the public 
treasury. The effect was almost magical, particularly in 
England. Although still another reform* was needed to give 
something like perfection, we never again strike anything 
resembling the condition of the coinage in 1695. Standard 
coins seriously short in weight, when deprived of all legal 
tender status, simply will not circulate. 

Principle 4. As betwee n tivo money s hariiii;; substan- 
tially the same function in a system, one of which is, and the 
other is not, a legal tender, particularly in payments between 
go'c'cniments and tlie public, the former zcill usually show 
greater tejiacity_in circulation. . 

Thus, the legal tender treasury notes issued during the 
Civil War seem to have proved able to displace, in a con- 
siderable measure, the bank note circulation. The reason 
for this is not far to seek. The money which has this pre- 
rogative of legal tender can be forced into circulation, not 
only in the first instance, but also as often as it may have 
been driven out. But, of course, no such possibility is open 
to a non-legal-tender money ; it must depend on voluntary 
acceptance. 

Principle 5. There is a quasi-compulsion zvhich helps 
tq_ secure so me currency for a money — at least delays its 
beings driz'en out, — ci'cn though it is not legal tender and is 
f_orj/arious reasons unacceptable. 

The preceding principles have brought out the influence 
of legal compulsion in determining a money's capacity to 
circulate. The principle now before us calls our attention 
to the part played by what is often called moral compulsion. 
It is a familiar fact that our conduct is influenced not only 
by the direct action of government but also by the existence 
of conditions which make our advantage dependent on a 
certain line of conduct. In the case of the circulating of 



* See Problem 2)2, ^^ the end of the chapter. 



92 CHAPTE^RS ON MONEY 

money, this moral compulsion, this quasi-compulsion has its 
origin in the fact that each of us is in a way at the mercy 
of the person to whom he wishes to sell his goods or ser- 
vices. Under a money regime, as we have seen, exchange 
is broken into two operations with an interval between. We 
sell our wares for money ; we use the money to buy other 
people's wares. But these two operations differ very much 
as respects their difficulty. It is easy to find some body 
ready to sell goods ; it is hard to find somebody ready to buy 
goods. The seller's goods are commonly useless to him 
except to get other goods with, and. in most cases, must be 
quickly disposed of or they will lose value. He must find 
a buyer at all hazard. Rather than not make a sale, he will 
accept some doubtful kind of money. That is, Jhe anxiety 
of sellers to effect sales enables buyers to force upon them 
undesirable money. 

Again, it is a familiar fact that this same anxiety for a 
market makes us very careful not to offend a customer. As 
sellers of goods or services we put up with much impatience, 
ill nature, and unreasonableness, which we should resent very 
energetically if we could do so consistently with business 
success. A necessary part of this complaisance is not being 
too particular as to the character of the money which we 
accept in exchange for our wares. Small retailers and 
workingmen feel almost compelled to accept whatever mon- 
ey is offered, unless it is hopelessly bad. We thus see that 
there are moral forces which tend to secure for almost any 
kind of money a quasi-compulsory acceptance. But such 
acceptance helps a money to get into circulation and hinders 
its getting out of circulation. It, therefore, helps to secure 
the currency of that money. 

The importance of the principle just brought out will 
appear incidentally in the further discussions of this chap- 
ter. But I wish here to illustrate it from a case which will 
naturally come up later. Some writers have contended that 
the issue of circulating notes should be absolutely free, 



PKlNCiri.KS Ot* CIRCULATION 93 

that, if ])eoplc are willing to accept John Smith's promise 
to pav instead of money, that is their own business, and 
the government should not meddle. The unsoundness of 
this view is seen at once when we have learned the law 
under discussion. Many people, and i)articularly those who, 
as being in a weak position economically, can make the 
strongest claim to the protection of the law, arc not per- 
fectly free to accept or reject any money which may be 
offered them. Instead they are more or less under compul-) 
sion to accept. The state, therefore, ought to make any 
effort to safeguard them against loss from such action. 

Principle 6. Onjy full-weight metallic jjioncy has a ny 
considerable currency Jn international trade. 

The reasonableness of this principle is easily made evi- 
dent. First, the dealers or bankers of one country can not 
ordinarilv utilize the money of another country as money. 
They can not use it ivithin their ozvn country, since accord- 
ing to Principle i it will not circulate there. On the other 
hand, they probably can not afford to use it as 
a means of making payments to the country from 
7vhich it comes; since they would not likely need 
it for this purpose for a considerable time and 
in the meanwhile would lose interest upon it. Accord- 
ingly, bankers or dealers must reckon on disposing of a 
foreign money in some other way than by making a money 
use of it, — thev will use it as metal or send it home to be 
exchanged for metallic money. But of these dispositions 
only the former is satisfactory ; since to send the money 
home for redemption means too much expense and trouble. 
Accordingly, bankers will commonly have to use foreign 
moneys as mere metal, and hence will commonly demand 
full-weight metallic monev.* 



* I am not sure that I have chosen the best explanation of this 
principle. Tt might perhaps be more correctly traced to the lack 
of faith in foreign things which shows itself in Principle i. Only^ 
full-weight money carries its own guarantee. 



94 CHAPTERS ON MONEY 

Principle 7. _Any money which has an e.vchang e_value 
ill any relation, greater than its nominal I'alue as tnoney zmll 
rarely /remain in circiilatioji.'-^' 

Thus, if at the present time a gold dollar could be sold 
for $1.05 in some form of current money, it would at once 
disappear from circulation. The truth of this principle 
could be proved as completely as any law of physical nature 
by an appeal to experience ; but the most convincing argu- 
ment comes from a consideration of the causes at work. 
The self-interest of individuals can be depended on to take 
out of circulation a money which is worth more for some 
other use than its nominal value as money. 

Two possible cases present themselves. ( i ) The money 
in question might pass at its nominal value only. (2) It 
might be accepted more or less widely at a premium above 
its nominal value. In the first case, the disappearance of 
said money would surely take place. Occasionally, indeed, 
careless or ignorant persons might ofifer the given money 
in exchange for goods. But sooner or later every piece 
would get into the hands of people more careful or better 
informed, and these people would quickly dispose of it in 
the market where its value was greater. 

The second case, where the money in question passes at 
a premium, would not give so prompt expulsion as the 
former case ; but the result would only be delayed. First, 
under any but the most favorable conditions, the premium 
on such a money allowed by the merchant would be less 
than that obtainable from the dealer in money. For, since 
the premium is constantly shifting, since the ordinary mer- 
chant is not in a position to know either the exact amount 
of the premium or its probable course in the near future, 
and since allowing for the premium involves labor and an- 
noyance, therefore the dealer almost necessarily makes an 



* This principle and the four following are often blended into 
one formula, "Bad money drives out good." Such a procedure has 
the advantage of sirapHcity; but i* is greatly lacking in precision. 



PRINCIl'I.ES OF CIRCULATION 95 

allowance safely above the market premium. Thus, even 
with a premium allowed, people will tind it more profitable 
to dispose of such money to institutions which buy it as a 
mere commodity rather than to use it as money. Secondly, 
in so far as merchants do receive money which is at a 
premium, they, being more alert in such matters than the 
general public, will almost surely sell it as bullion rather 
than using it for till money. Finally, even though mer- 
chants are as careless as the general public, the money in 
question will presently get into the hands of bankers who 
will beyond question take it out of circulation. 

Corollary i. // tJie legal or business conditions are such 
that coins zvhich are much zoom or even dipt, continue to be 
q^j^lid tender in some important relation, particularly for 
public dues, coins of full weight zmll usually disappear from 
circulation. 

Argument : Under the conditions named, the short- 
weight moncN' makes itself standard money, (See Principle 
6, Chapter V ) ; the full-weight money then comes to have 
openly or secretly an exchange value in excess of its nom- 
inal value, and so is brought under the operation of the 
principle. 

The principle brought out in this corollary has been ob- 
served from the earliest times. It is often stated in this 
form : "Bad money drives out good." It is probably the 
one of many principles to which the name Gresham's Law 
has been applied which has the best claim to the title. In 
our day it has relatively little significance, for the reason 
that the condition requisite — that the money in question 
continues to be a valid tender — is now seldom fulfilled. 

Corollary 2. //, under a syston of bimetallisin, the niar^ 
ket ratio betzveen the tzvo metals used as money comes to be 
different from the mint ratio, the metal zvhich is underrated 
inTThe mint zvill commonly disappear from circulation. 
' Thus when France was coining both gold and silver at 
a ratio of 15.5 to i, while the market ratio was 15.3 to i, 



96 CHAPTERS ON MONEY 

the silver rapidly disappeared from circulation. This was 
inevitable. First, since it took on the market but 15.3 grains 
of silver to equal i of gold, the mint in using 15.5 grains 
of silver for i of gold, used too much silver ; that is, the 
bullion in the silver coin was worth more than the bullion 
in the corresponding gold coin. But in that case the silver 
coin must have been worth correspondingly more than the 
gold coin, that is, the silver commanded a premium in terms 
of gold. It, therefore, was withdrawn from circulation. 

Corollary 3. If a general suspension of payment on 
circulating notes is aiitliori::ed by the government or is ac- 
quiesced in by the general public, the money zi'hich the notes 
promise to pay zmll commonly disappear from circulation. 
Thus, in December of 1861 the banks of the United 
vStates generally suspended gold payments, but continued, 
with the acc[uiescence of the public, to carry on business with 
deposit currency and notes. At once gold almost every- 
where disappeared from circulation. That such a result 
was bound to follow is easily shown. Circulating notes are 
promises to pay on demand. If immediate payment is re- 
fused, even though ultimate payment is assured, some de- 
cline in value is certain to come, — the amount depending 
largely on the skill and wisdom of those who issue the 
notes. Again, since the suspension is more or less complete- 
ly authorized, the notes take on the character of a zmlid ten- 
der for debts. Being thus the cheapest valid tender, they 
become standard money; that is, their inferiority in value 
shows, not in a discount on them, but in a premium on the 
money which they promise to pay. ( See Principle 6, Chap- 
ter V.) But, since the money which the notes promise to 
pay is at a premium, it will, according to our principle, 
usually disappear from circulation. 

Corollary 4. A circulating note u'hich bears interest 
tends to disappear from circulation ivhencver a claim for 
interest has accrued upon it. 

This was illustrated in the Civil War when the Federal 



PRINCIPLES OP* CIRCULATION 97 

government issued several hundred millions of interest-bear- 
ing notes. On some of these the interest was payable semi- 
annually. In their case the note disappeared from circula- 
tion as the date for interest payment ai:)proachcd, then went 
into circulation again as soon as the coupon had been cut 
off and paid. On another class the interest was compound- 
ed semi-annually but not paid till the note matured, i. e., 
after three years. Of these compound interest notes the 
majority quite early passed out of circulation. They were 
treated as bonds for investment rather than as money. The 
reasoji in both cases is plain. As the interest claim on any 
note accrued, the holder found the note worth more than 
its nominal value and so held the note back or sold it to 
some bank for the face plus the premium. 

Principle 8. /// the case of standard metallic money, 
the lii ihtcr coins, pnrridcd flicy are not sufficiently short in 
zveight to come under the operation of Principle ^, coni- 
monly sliozc g reater tenacity in circnlation than the heavier 
ones. 

In this principle we have the modern form of a principle 
which has been observed from the very earliest times. If 
either o f two standard coins goes, it is not the worse but the 
better. A gold eagle which is a grain short in weight is more 
persistent in circulation than one of full weight. The prin- 
ciple has frequently been confirmed in experience, and its 
reasonableness on theoretic grounds is easily shown. 

Stated in general terms, the argument for the principle 
is that the processes whereby a light coin which is good 
enough to circulate at all is gotten out of circulation are 
relatively less efficient in action than the processes whereby 
a heavy coin is gotten out. First, there is practically but 
one process whereby inferior coin of the sort described gets 
out of circulation, viz. withdrawal for recoinage. For by 
hypothesis these coins are not bad enough to be stalled — 
driven out under the operation of Principle 3 ; and they will 
not be withdrawn for hoarding, export, melting, or mar- 



98 CHAPTERS ON MONEY 

keting, since only superior coins are used for these pur- 
poses. 

But, secondly, the process of withdrawal for recoinage 
is usually very limited in its operation. Since it involves 
considerable trouble, it will be undertaken only by a few 
great banking institutions which get hold of these coins in 
large amounts. But, since in most countries, inferior coins 
are accepted by mints and therefore by banks, only by 
weight, such coins are purposely withheld from banks and 
employed only in the general circulation. That is, deposi- 
tors in taking funds to banks cull out the short weight ones 
and keep them for use as till money. Thus the banks nor- 
mally get a chance to turn into the mint for recoinage only 
a small share of the inferior coins ; and so the tendency of 
such coins to be gotten out by this process is very weak.* 

We have seen that the processes whereby inferior coins 
are taken out of circulation operate with little efficiency. 
We hardly need to elaborate the other half of the argu- 
ment, that is, that the processes which take out superior 
coins act strongly and effectively. One of these at least — 
melting — makes a very considerable and almost continuous 
drain, especially in those countries which maintain a con- 
siderable amount of standard money in circulation. 

Corollary. Generally speaking, the stock of standard 
iiietallic money tends to show a progressive deterioration. 

As a result of natural wear and fraudulent manipula- 
tion, that portion of the stock of coins which is in active 
use comes to be more or less short in weight. But, once 
this has happened, such coins are studiously avoided when 
any withdrawals are made and, thus, their continued cur- 
rency is assured. On the other hand, the stock of full 
weight coins is constantly being depleted by withdrawals 
for use in the arts ; while that portion which is left behind 



* The reasoning of this paragraph has been weakened by recent 
legislation. See Problems S3 and 37. 



I'RlNCU'IJvS OF ClKCUI,ATlON 99 

goes into active circulation and soon joins the ranks of light 
weights. Thus, deterioration tends to heconie general. 

This reasoning has been confirmed by experience times 
without number. Earlier the process of deterioration was 
often incredibly rapid, and the degree incredibly great. As 
already explained, laws of the severest sort proved unable 
to put a stop to intentional mutilatit)n. Repeated efforts to 
restore the integrity of the metallic currency ])v recoinage 
were unable to eft'ect more than a momentary improvement. 
Under modern conditions things have been by no means so 
bad. Governments have learned to utilize, in this connec- 
tion, Principle 3. Still an investigation by Jevons into the 
condition of the gold coin of England in 1869 showed "that 
313^ per cent of the sovereigns and nearly one-half of the 
ten-shilling pieces were then below the legal limit." ( Mon- 
ey and the Mechanism of Exchange, p. 112.) The only 
plan which promises adequately to meet the difficulty, es- 
pecially in a country which uses its standard coin for cir- 
culation purposes, is the assumption by the state of the 
entire trouble and expense of recoinage. 

Principle 9. As bct:^.'cc)i a standard metallic money and 
bank notes, the latter usually show the greater toiacitv in 
circulaJidn. 

This is a proposition which could be established only by 
experience ; and it has been so established. Nearly always 
when a satisfactory bank note is introduced into a circula- 
tion which previously had a large standard money element, 
the latter soon becomes comparatively insignificant in 
amount. The reasons are not far to seek. First, the stand- 
ard money is subject to a drain not felt at all by the bank 
notes ; viz. melting for use in the arts. Secondly, the pro- 
cess by which bank notes get out — going home for redemp- 
tion — operates very weakly for two reasons, (a) the notes 
are quite as satisfactory as standard money, often indeed 
even more so, (b) securing redemption commonly involves 
some trouble and expense. Thirdly, any tendency which 



lOO CHAPTERS ON MONEY 

bank notes may show to get out of circulation by being 
sent home for redemption, is largely neutralized by the 
fact that the bank has both motive and opportunity to dis- 
criminate in favor of the use of its notes when making cash 
payments to the public. 

Principle lo. As hcticccu bank notes at par and hank 
notes at a discount the latter are likely to show the zreatcr 
tenactry m circulation. 

This principle is of no significance at present, but was 
often illustrated in the days when state banks issued cir- 
culating notes. Thus in New England in the early part 
of the nineteenth century, the country bank notes had more 
])Ower to circulate in Boston than the notes of the Boston 
banks themselves. 

The argument for this principle is analogous to that 
used under Principle 8. The good notes will experience 
more drain than the poor ones. Bank notes are retired by 
being presented to the issuer for deposit or redemption. 
But this operation goes on much more easily with good 
notes than bad ones. This is explained as follows. The 
chief agencies for effecting the presentation of notes to the 
issuing bank are its rivals — other banks. That is, when 
depositors bring in bank notes along with other money, 
checks, and drafts, the bank receiving these deposits will, 
under a system like that of New England, sort out the notes 
of other banks and send them to the issuer or his agent for 
redemption. But, if the notes of a particular bank are at a 
discount, business men will be careful not to present them 
for deposit, because they would then lose the discount. 
Rather, they will retain such notes for use as money in 
ordinary dealings, where there would very likely be no dis- 
count. Thus, the bad notes, failing to get into the hands 
of bankers, will fail to be retired. Good notes, on the other 
hand, will be started on the journey very promptly. Busi- 
ness men will sort them out purposely to deposit in the 
banks at the same time that they keep back bad notes for 



PRINCIPLRS OF CIRCULATION lOI 

the circulation. I hit, once the g^ood notes g-et into the hands 
of the hankers, they are quickly retired hy presentation to 
the issuing bank. 

if 

The last topic which the subject of circulation presents 
to us is the distribution among the different parts of the 
monetary stock of the several grades and kinds of money, 
with the effects on the composition of these different parts 
which this distribution produces. Which will get the in- 
ferior moneys, the circulation proper or the reserves? How 
will the monetary stock of centers like New York compare 
with that of the Interior? and so on? Here we have three 
principles of some importance. 

Principle ii. The monetary stock tends to be distrib- 
uted in such fashio)i that the inferior moneys are massed in 
the circulation proper, the superior moneys in the reserves. 

The expression "inferior moneys" here means those 
which are for any cause less desirable than some other. 
They may be wanting wholly or partly in the legal tender 
property. Even if full legal tender they may be short in 
bullion value and not redeemable. And so on. Thus, in 
the United States, bank notes are inferior to treasury notes 
in that they can not be used for bank reserves or to pay 
duties on imports. Treasury notes are inferior to gold or 
its certificates in that there is always a possibility that the 
obligation to redeem them might be suspended or repudi- 
ated. Silver dollars are inferior to the three named ; to 
gold since they have less than half enough bullion value to 
cover their nominal value, and to treasury notes and bank 
notes in that, unlike these notes, they are not either directly 
or indirectly redeemable in gold. The principle tells us 
that the less desirable moneys gravitate to the circulation ; 
the more desirable to the reserves. 

That matters must work this way is plain enough from 
the circumstances of the case. That portion of the money 
stock will get the better money where the motives and power 



I02 CHAPTERS ON MONEY 

to discriminate among- moneys are stronger. And plainly 
this is the case with the reserves. People generally who 
are called on to accept the money in ordinary circulation 
have little disposition and comparatively little power to 
discriminate against any of it. On the other hand, with 
the reserve keepers ; viz. the banks and the Treasury, the 
case is very dififerent. First, they have powerful motives 
to choose among moneys, in that some of these, — e. g., non- 
legal tenders, — would be quite useless for their purpose, 
while others would be decidedly inferior in certain cases, 
e. e., silver to those bankers who are called on to furnish 
gold for export. Secondly, the banks, at least, have ample 
power to discriminate among moneys. The public are ac- 
customed to a more rigid policy on the part of bankers 
than would be tolerated with any other class of business 
men. Besides, a bank has passing through its hands each 
day thousands of dollars ; and, therefore, can by the exer- 
cise of a little care get rid of the inferior, and retain the 
superior, money without causing offense to any one. The 
position of the Treasury is not cpiite so strong. Still it 
has the advantage of dealing almost entirely with the banks, 
and that, too, the banks of New York City, whereby it gets 
the benefit of the discrimination exercised by those institu- 
tions. It is, thus, evident that the better money naturally 
gets into the reserves ; the worse, into the circulation proper. 

Principle 12. The monetary stock tends to distribute 
itself so that tJie money of smaller denominations is in the 
circulation proper, lehile that of larger denominations is 
in the reserirs. 

This law is an inevitable consequence of the causes at 
work. Such a distribution is most desirable from the stand- 
point of those who have the power to bring it about. The 
circulation needs to consist largely of small money ; for 
this only could be useful for the purpose. This follows 
from the fact that its employment is to effect comparatively 
small payments and make change, — large payments being 



PRINCII'I.KS OF CIRCULATION IO3 

commonly made with checks. On the other hand, the mon- 
ey of the reserves can scarcely he too large in denomina- 
tion, since it is seldom transferred from one person to an- 
other and then only in large snms. Thus, it is desirable 
from ever\body's standpoint that the distribution described 
in the principle should be effected. Rut the power to effect 
it is also present. The public, needing small money, will 
call on the banks for it ; and they will gladly part with what 
they themselves do not care for. On the other hand, the 
banks desiring large denominations for their own reserves, 
will cull out such from the money constantly passing 
through their hands, and pass on the small money to the 
general public. 

The principle before us has been made use of in a very 
ingenious way to avoid danger from the excessive stock 
of silver dollars. These dollars can not be used for export 
nor are they redeemable in gold which can be so used. It 
is therefore quite important that this sort of money should 
not be allowed to accumulate at those points from which 
monev has to be taken for export, lest it should crowed out 
the gold which is needed at those points for this purpose. 
But the principal city from which gold needs to be taken 
for export is New York. It is, consequently, very impor- 
tant that the reserves of New York should be kept compar- 
atively clear of silver. 

Now this point just explained was understood from the 
first issuing of silver dollars in 1878. But during some 
years, accomplishing the work — keeping these dollars out 
of New York — proved to be no easy task. As coins, the 
country wanted less than 60 millions of them. Even in the 
form of certificates, running in denominations of ten dol- 
lars and upwards, the whole outstanding stock could not 
be kept busy. Some improvement was experienced when 
treasury notes of small denominations were retired ; since 
this increased the unoccupied space in the paper circulation 
available for silver in the form of certificates. But a far 



I04 CHAPTERS ON MONEY 

greater change — an almost magical change — took place 
when it was enacted in 1886 that silver certificates might 
be issued in one, two, and five dollar denominations. Under 
this plan, the country quickly absorbed the whole stock. 
And in spite of the subsequent great increase in the total 
amount, there has been most of the time no difficulty keep- 
ing this sort of money out of the central reserves. The 
Act of 1900 perfected the plan by requiring that all but ten 
per cent of the silver certificates should be in denominations 
of ten dollars and under, and that no more than one-third 
of the national bank notes should be of denominations un- 
der ten dollars. As a result of these various provisions, the 
natural working of monetary forces distributes the silver 
in the form of certificates where it does no harm, where in 
fact it answers almost as well as any other kind of money 
would. 

Principle 13. // for any cause distrust in the monetary 
system conies to be felt, inferior legal tender nioneys tend 
to graz'itate to the Treasury holdings and superior moneys 
to the hankinz reserves. 

Under the conditions named, the banks have at once the 
motive and the power to bring about this result. The mo- 
tive is furnished by the fact that, if the system should be 
even temporarily overthrown, those institutions holding the 
best money would sufifer least. The power comes from the 
fact that the banks have greater liberty of action in select- 
ing the kind of money they will pay to the Treasury than 
has the Treasury in selecting what it will pay them. 

The explanation of this fact is as follows. In paying 
import duties and other dues to the Treasury, the banks 
are of course free to employ any legal tenders, and naturally 
enough turn in the inferior ones. On the other hand, when 
the Treasury comes to make payments to the banks, the case 
is quite dififerent. For at least three classes of payments, 
viz ; redemption of notes, interest on the public debt, and 
the principal of more than half the bonded debt, only gold 



TRINCIPLES OF CIRCULATION I05 

is legal tender. But even in cases where this is not true 
the Treasury cannot properly force any particular legal ten- 
der on any of its creditors, since such action would be al- 
most certain to discredit that legal tender and so cause a 
fall in its value below gold, — a result which the law ex- 
pressly commands the Secretary to avoid. Thus the Treas- 
ury must to a large extent take what the banks have a 
mind to bring, while it must give what the banks have a 
mind to demand. The result laid down in the principle is 
inevitable. The arising of any serious distrust of the money 
system is likely to be followed by a redistribution of the 
monetary stock in the banking reserves and the Treasury 
reserves whereby the superior moneys settle in the former, 
the inferior in the latter. 

Corollary. A)ty considerable excess in the volume of 
an\ inferior legal tender is likely to shoiv itself in the pre- 
ponderance of such legal tender in the Treasury receipts and 
holdings. 

This corollary was illustrated several times in the mone- 
tary history of the United States between 1880 and 1900. 
The argument for it is plain. If such a legal tender is in 
excess of those uses to which it can advantageously be put, 
it will soon force itself into the holdings of the central 
banks ; its presence in the reserves will then arouse distrust 
among bankers ; when, finally, Principle 13 will be brought 
into operation. 

PROBLEMS. 

1. "Under a good redemption system bank notes are 
easily gotten out of circulation by return to the issuer. 
They, therefore, have very little tenacity in circulation." 
Can you give a reason to the contrary? 

2. Our country always contains a great many people 
who show much anxiety lest we should have too little cir- 
culating medium. The same people often advocate strong- 



I06 CHAPTERS ON MONEY 

ly the policy of putting a high tax on the issue of bank 
notes. Are the two positions consistent? 

3. On page 82 it is said that governments and banks 
have much opportunity to get money into circulation than 
manufacturers or farmers. Explain this more fully. 

4. In the earlier stages of commercial development, it 
seemed necessary that the medium of exchange should be 
something having just as much use-value as exchange value. 
Why was this so? 

5. It is often said that our bank notes are too good to 
have good "homing powers," that is, tendency to return to 
the issuing bank. Explain why goodness should have this 
efifect. 

6. In 187 1 -1873 the German Empire changed from a 
silver to a gold standard, and at once began withdrawing 
and selling its silver thalers, which contained 257.2 grains 
of pure silver and were legally rated as the equivalent of 3 
marks or 16.59-}- grains of pure gold. In 1879 ^^^^X stopped 
selling the thalers and have never since been willing to re- 
sume on account of the great loss involved. How would 
there be any loss? 

7. Even one who looks on money as really nothing 
more than a due bill on the community for goods equal in 
value of the money, might nevertheless think it better that 
monev should have metallic value equal to its face value. 
Why? 

8. In the German banking law it is provided that no 
bank can pay out the notes of other banks, except in the 
home town of the issuing bank. This, however, does not 
apply to notes issued by the Imperial Bank, but only to those 
of the seven local banks. Can you explain the object of 
this provision? 

9. In many of the plans for reforming our bank notes 
proposed during recent years, occurs a provision for the 
establishment of several new redemption agencies in various 
parts of the country. Would this tend to increase or di- 



PKINCIPLES OF CIRCULATION I07 

minish the hold of the notes on the circulation? Explain. 

10. Chief Justice Chase, who was largely responsible 
for the issue of greenbacks, later said. "The legal-tender 
quality (in greenbacks) was valuable only for purposes of 
dishonesty." Is that opinion sound? 

11. Why should Canadian coin circulate in the United 
States near the border but not elsewhere? 

12. Not many years ago the circulating medium in a 
small lumber town in Northern Wisconsin consisted chiefly 
of the due bills of the general store kept by the principal 
lumber company. Is this fact consistent with Principle 2? 

13. Look up the history of our trade dollar authorized 
in 1873 and find in it some confirmation of Principle 2. 
(White's Money and Banking, p. 37.) 

14. From Principle i we learn that money will not 
commonly circulate outside the territory where it is legally 
authorized. How is it. then, that Liverpool or London 
banks will readily accept at par national bank notes of the 
United States? 

15. It has sometimes been argued that we ought to 
leave the manufacture of money to private enterprise just 
as we do that of shoes, or rakes, or boxes. Show that 
Principle 5 furnishes an argument against such a policy. 

16. During the years from 1852 to 1864 the French 
circulation absorbed about $680,000,000 of gold, and eject- 
ed about $345,000,000 of silver. Explain these facts. 

17. Our silver dollar contains 412.5 grains of metal 
nine-tenths fine. A gold eagle contains 258 grains of metal 
nine-tenths fine. Compute the mint ratio between the two 
metals. 

18. Our fractional silver contains 384 grains to the 
dollar (nine-tenths fine). Compute the mint ratio between 
gold and silver as used in fractional coins. 

19. Our Philippine peso contains 412 grains of stand- 
ard silver and is rated as equivalent to one-half of a dollar, 



I08 CHAPTERS ON MONEY 

i. e., 12.9 grains of gold. What is the mint ratio between 
silver and gold in the Philippines? 

20. What market ratio between gold and silver would 
tend to drive silver pesos out of circulation in the Philip- 
pines ? 

21. If the government is anxious to raise funds by 
issuing legal tender notes and yet wishes to regulate these 
in such a way that they will be kept out of circulation, 
should it make these notes interest-bearing or not? Ex- 
plain. 

22. In December. 1861, specie payment on circulating 
notes, both bank notes and treasury notes, was suspended ; 
and gold promptly went to a premium and disappeared from 
circulation. Fractional silver, however, remained current 
several months longer. Explain the action of the fractional 
silver ? 

23. About 1849 there took place a considerable fall in 
the silver price of gold, so that the silver in an American 
silver dollar was worth from 2 to 3 cents more than the 
gold in a gold dollar. In consequence, gold became the 
standard and silver coins generally went out of circulation, 
none but the much- worn ones remaining. Explain (a) 
why most went and (b) why some stayed. 

24. Give some reasons why it is true that people of 
moderate means and the poorer classes are in some respects 
more interested than the very wealthy in keeping only good 
moneys in circulation. 

25. In 1806 President Jefferson stopped the coinage 
of silver dollars by the United States mint. Look up the 
explanation in White's Money and Banking and show how 
it illustrates Principle 7. 

26. In 1825 the banks of Boston established a system 
whereby the redemption at par in Boston of country bank 
notes was provided for — the expense being borne indirectly 
by the issuing bank. What do you suppose they hoped to 
accomplish by this arrangement? Why was success likely? 



PRINCII'LES OF CIRCULATION I09 

2^. Some time about 1855 a French newspaper pub- 
lished as a notable item the statement that at certain rail- 
way stations ticket agents every now and then received in 
payment silver five-franc pieces, although the market ratio 
between gold and silver was about 15.32 to i while the 
mint ratio was 15.5 to i. Why was there anything notable 
about the item? 

28. In i8qo the United States provided for the issue 
everv month of legal tender treasury notes to be used in 
the purchase of silver bullion. Under the operation of this 
law over $150,000,000 in these notes were added to the 
circulation during the next three years. The very great 
net export of gold characterizing the four years beginning 
with 1893 is commonly thought to be in some measure a 
direct result of this issue of notes ; that is, it is held 
that the notes drove out the gold. Show that this is prob- 
ably true in spite of the fact that there was no difference 
in the exchange values of the notes and gold. 

29. It is sometimes said that "bad money drives out 
good" only when there is an excessive stock of money in 
general. Show that this is not true, that even under nor- 
mal conditions inferior coins stay and superior coins go. 

30. In most European countries bank notes as low as 
$5 can not be issued. In England the lowest are £5. and in 
Germany 100 marks. Can you imagine a reason for this 
based on any principle contained in this chapter? 

31. In 1 717 the English government issued a procla- 
mation declaring gold and silver current at a ratio which 
made 21 silver shillings equivalent to i gold guinea. At 
the same time the market ratio between the metals was such 
that 20>4 silver shillings were equivalent to I gold guinea. 
Under these circumstances gold established itself as the 
standard : what then must have happened to silver coin ? 
Explain. 

32. When in 1695 the English exchequer made some 
experiments to test the quality of the circulation, they found 



no CHAPTERS ON MONEY 

that practically all the coins then current were minted prior 
to 1660. Why were none of the beautiful new gold coins 
issued under Charles II to be found? 

33. Explain how provision for the redemption at face 
value of worn coins tends to neutralize the working of the 
law contained in the corollary of Principle 8. 

34. Why is it important that there should be a large 
element of gold in the receipts of the Federal treasury? 

35. Show that under existing conditions Principle 12 
helps to keep silver out of the Federal treasury. 

36. Explain how the legislation of 1886 referred to on 
page 104, contributed to the maintaining of the gold stand- 
ard. (Compare Principles 12 and 13 with what is said with 
respect to the ultimate reserve in Chapter 2. ) 

^7. What is at present the practice of Great Britain 
with respect to the redemption of worn coins ? the practice 
of Japan ? the practice of the United States ? Authorities : 
London Economist, Count Masayoshi's Report on the Adop- 
tion of the Gold Standard in Japan, and Dunbar's Coinage 
and Currencv Laws of the United States. 



CHAPTER IV. 

THE GEOGRAPHICAL MOVEMENT AND DISTRI- 
BUTION OF MONEY. 

The monetary s.ock of any country, as also of the world, 
is in a state of constant movement. Scarcely a day passes 
without the shifting" of considerable sums in the shape of 
actual cash between different districts of the same country ; 
and ewn the movements between nations, though by no 
means so frequent, are in the aggregate very extensive. 
For various reasons these movements of money are of much 
interest and significance, both to the specialist and to the 
general public. First, every money movement considered 
by itself tends to bring about a change in the distribution 
of the money stock among different districts or countries ; 
and, if for any reason the movement in one direction is 
long enough continued, this redistribution may work con- 
siderable inconvenience, causing" an excessive supply at 
one point and a deficient one at other points. As a matter 
of fact there is much less danger of such a result than is 
commonly supposed. Most monetary movements will prove 
quite harmless. Still there are some which need to be, and 
can be, checked. Further, a knowledge of even the harm- 
less ones is desirable to guard against needless anxiety and 
foolish efforts to check those movements because they are 
supposed to be pernicious. 

In the second place, there are certain monetary move- 
ments which indicate diseased conditions in the monetary 
system. Plainly a knowledge of these is desirable in order 
that steps may be taken to remedy the evils which are dis- 
closed by the abnormal movements. Again, there are cer- 
tain periodic movements which regularly cause temporary 
excess at one point and temporary deficiency at another, and 



112 CHAPTERS ON MONEY 

which can not under existing conditions be eHminated. A 
knowledge of them, however, enables us to anticipate the 
trouble and in considerable measure to prepare for it. For 
all these reasons it is desirable that one should become ac- 
quainted with the natural laws which regulate the move- 
ments of money between different countries or districts and 
the territorial distribution of the stock of money which 
results from these movements. 

I. THE DIFFERENT KINDS OF MONEY MOVEMENTS. 

Our first task must be to inform ourselves with respect 
to the more superficial and general facts of the matter. 
First, we need to distinguish between grassland iicj money 
movements. If, during the course of the summer, tourists 
are taking out, say, 70 millions of dollars, while immigrants 
and foreign travellers are bringing in eighty millions, the 
gross movement inward is of course 80 millions, but the 
the net movement is only 10 millions. It is manifest that 
only net movements have any effect on the distribution of 
the world's stock of money ; but, in order to get a knowledge 
of net movements, we need to inform ourselves in some 
measure with respect to gross movements. 

Again, money movements are to be distinguished as 
f^rivate and banking movements. The former cover the car- 
rying or sending of money by individuals or outside corpor- 
ations~oF the agents of these. The latter cover the send- 
ing of money by banks, express companies, or other institu- 
tions which make a business of effecting remittances for 
the public. Private movements are in our day relatively 
unimportant ; since almost every one depends on some sort 
of money order in making remittances. Further our direct 
knowledge of private money movements is necessarily very 
small. Accordingly, although such movements do con- 
stantly take place and in some cases probably play a con- 
siderable role in determining the distribution of money, we 



iM()\'EMKNTS AND DISTRIP.UTION II3 

give ihem little attention in a scientific study of the matter. 
It is baiikiiii^ inoi-cntciifs to which our attention nuist prin- 
cipally l)e devoted. 

Of 1)an king movemen ts it is first to be remarked that 
they naturall y subdivide into ordinary or exchans:e j npve- 
ments and special movements. The former are those mov e- 
ments which grow out of the business of effecting paynie nts 
in distant places. — a business commonly carried on by banks, 
express companies, and the post office. These exchange 
movements are much the most important with which we 
shall have to deal ; and the theory of them is a study of 
some difficulty. It will, therefore, be necessary at this 
point to go into fairly full explanations. 

It is doubtless already well known to us that under 
modern conditions there is very little direct transfer of 
money between buyers and sellers or debtors and creditors, 
when the two are located in different places. When we sell 
goods to the people of another country, we do not commonl_v 
collect the pay directly from our customer. Instead, we sell 
our claim on him to a banker or dealer in exchange, who 
thus becomes a creditor of the foreign customer for a 
claim which he will later set out to collect. Or the buyer 
sends us an order by a bank in his country telling one of 
our banks to pay us the money, which, being done, makes 
our bank the creditor of his bank for the amount of the 
bill. In either case, one of our bankers or exchange dealers 
comes into possession of the claim on the other country 
which grew out of the sale. So, when we buy from the 
outsider, we do not pay him directly ; we rather leave him 
to dispose of his claim on us to his banker, or we arrange 
with our banker to order the foreigner's banker to pay 
the bill for us ; and, in either case, one of the bankers of 
the other country comes into possession of the claim on our 
country created by the transaction. Accordingly, we mav 
say in general that the money claims in favor of the people 
of any country growing out of the foreign trade of that 



114 CHAPTERS ON MONEY 

country get into the hands of the bankers or exchange deal- 
ers of that country. 

But, again, what is true of the claims of a country grow- 
ing out of its foreign trade, is equally true of the ohligations 
growing out of that trade. This is evident enough when 
the buyer in New York has paid the seller in London by 
sending him a draft drawn by his New York banker on a 
London banker. For, just as soon as the London banker 
pays the draft, he makes the New York banker his debtor 
for the amount of that draft. But, even when the London 
seller collects his pay by drawing a bill on the New York 
buyer and selling it to his banker, things will inevitably be 
arranged so as to make some New York hanker, rather than 
the New York buyer, the debtor to the London banker. For 
the London banker, having come into possession of the bill, 
will not try to collect it directly from the drawee in New 
York, but will rather sell it to some New York banker, by 
whom the collecting will be done. In short, the reciprocal 
debits and credits between the merchants of different coun- 
' tries growing out of their reciprocal trade are almost en- 
tirely transmuted into the form of debits and credits be- 
tween the bankers or exchange dealers of those countries. 

We have just seen that in international trade the debits 
and credits growing out of that trade become concentrated 
in the hands of the bankers of the ditTerent countries. It 
now follows inevitably that the bankers of each country, 
taken as a whole, instead of sending or collecting money 
for each debit or credit taken by itself, will as far as pos- 
sible use all the credits of the country to cancel its debits. 
This would be true of any one banker, as a matter of course. 
He would surely use whatever claims he had against his 
correspondent in a foreign country to offset the claims which 
his correspondent could bring against him. But the state- 
ment is almost equally true for the bankers or exchange 
dealers of a country, taken as a whole. Banker A. of New 
York, in settling with his London correspondent, will not 



MOVEMENTS AND DISTRIBUTION II5 

be willing- to send money to London, just because the cred- 
its on that city zvliicli he happens to have on hand fail to 
offset his debits. Wishing to avoid the trouble and ex- 
pense to be incurred if he ships gold, he will, before doing 
so, try his best to buy London credits on the open market. 
In order to bring out all that could be made available, he 
will even raise the price which he ])ays for such credits as 
high as it can be without making this method of settlement 
more costly than sending gold would be. Consequently, if. 
anyzchere in Xezc ]'orL\ there are enough credits on Lon- 
don to offset debits to that city they will be used for that 
purpose. 

\Ve have seen that the reciprocal debits and credits be- 
tween countries growing out of reciprocal trade get into 
the hands of the bankers of each country, and that credits 
are just as far as possible used to offset debits. The stu- 
dent will readily believe what must now be added, that at 
times a country's credits on some other country will not off- 
set its debits to that country ; and that, therefore, money it- 
self must be sent to make good the balance. It is this case 
which gives what we designate as ordinarv or "exchanefe" 
niovements. They co nstitute by far the majority of all 
iiionc} n'Ovements. They are practically the only ones 
which the business workl tries to keep track of. Thev are 
almost the only ones which science attempts to study. 

In contrast with exchange money movements^ "special" 
movements are those which are brought about with a con- 
scious purpose to get the money to a place where it is 
wanted. They are not made to settle an adverse balance 
created in the course of trade. In fact "special" movements 
may take place simultaneously with "exchange" movements 
running in the opposite direction. Thus, when in 1892 
Austria was preparing to go to a gold standard and so was 
accumulating reserves of gold, the central bank is said to. 
have made a contract with a Paris syndicate by which the 
latter was to furnish the bank with a large amount of gold 



Il6 CHAPTERS ON MONEY 

iust as another syndicate might supply them with coal or 
lumber. In carrying out the contract, the French syndicate 
paid a special price for the gold in New York, London, and 
other cities, with the result that gold more than once left 
New York for Paris when other shipments were going 
from Europe to New York in the regular course of busi- 
ness.* It is not, however, necessary that "special" move- 
ments should run counter to ordinary — "exchange"- — move- 
ments. Almost every summer in the United States the two 
classes coincide. That is, the interior banks, in order to 
provide for local needs, inaugurate a "special" movement 
toward the West and South b}- calling home the money 
which they have lent to New York during the winter ; 
while, verv soon after, an "exchange" movement in the same 
direction arises from the fact that the East, in buying the 
cotton, wheat, meat, and so on, of the South and West, 
gets heavily in debt to those sections. 

Other cases of "special" money movements arise in con- 
nection with the effort to redistribute subordinate moneys. 
Thus, at certain seasons of the year the United States treas- 
ury is constantly being called on to furnish silver dollars, 
small bills and fractional silver to the different parts of the 
country ; for such moneys, when out of use, show a ten- 
dency to gravitate back to the centers of trade and finally 
to the Treasury, and, consequently, have to be pumped out 
when, at some later time, they are again needed in the coun- 
try. y 

( )f these two classes of money movements wdiich we 
have just been considering, ex change move ments and spe- 
cial movements, the former g"ives us two subdwisions ; 
( I ) those which grow out of trade transactions, the buying 



* Tn international dealings "special" movements can usually be 
distinguished from "exchange" movements, by the fact that they do 
not seem warranted by the rate of exchange. 

t Dr. One, who is connected with the Bank of Japan, tells me 
the Imperial Bank of Japan has to play a similar role in Japan. 



MOVEMENTS AND DISTRIBUTlOxN I17 

and selli ng" of goods, and (2) tlioM/ wliioli .l^i'mw mw of ;'//- 
■:rstiiiciif transa ctions , the shiflini;- oi' capital frgm one dig- 
trict or country to another. "Trade"' movements are illus- 
trated by the second movement from the East toward the 
South and West alluded to in the next to the last para- 
gTaph. Investment movements are less easy to dis- 
tinguish in any actual case. But there have occurred 
many movements which certainly seem to belong" in 
this class. Thus in 1870, shortly after the outbreak 
of the Franco-German war. when people in France 
had set about shifting" their capital to London or 
other large cities, there started up a large out- 
ward movement of gold, which the government considered 
it necessary to stop by requiring the Bank of France to sus- 
pend specie payments. There seems little doubt that this 
gold export was only a manifestation of the capital export. 
Again, there can be no serious doubt that the very notable 
withdrawal of European capital from the United States 
which took place during the four or five years following 
1890, played a very considerable part in explaining the large 
net export of gold which characterized those years. 

The different classes of money movements which have 
just been described need for some purposes to be grouped, 
in other ways. One of these gives us the distinction of 
i iafiirai spontaneous, movements and i irfifjrin l movements. 
Private movements and exchange movements go together as 
natural movements. They arise spontaneously in the carry 
ing out of trade and investment transactions. "Special' 
movements, on the other hand, are artificial movements, 
being undertaken by bankers to accomplish special objects 
connected with the monetary system. It is a matter of 
course that a study of the principles regulating money move- 
ments will be largely confined to natural or automatic move- 
ments ; since artificial niovements, just because they are arti- 
ficial, will not submit themselves to natural laws in just 
the same sense as do natural movements. 



Il8 CHAPTERS ON MONEY 

Another method of groupin£^ money movements which 
we shall find it convenient to have in mind as we proceed 
with this topic is one which distingnishes such movements 
as either (i) industrial or (2) sysfciiiic. V>y "industrial" 
movements I mean those which are incidental to the nor- 
mal operations of trade and investment. P>y "systemic" 
movements I mean those which are consciously or uncon- 
sciously directed toward the regulation of the monetary sys- 
tem. — adjusting the quantity to the need for it. Thus, when 
in the fall of the year gold flows from Europe toward Amer- 
ica to make good the balance against Europe due to her 
buying of our agricultural products, we have an industrial 
movement. On the other hand, when gold flows from Aus- 
tralia toward Europe because gold is produced in Aus- 
tralia and so the Australian stock is relatively excessive, 
we have a systemic movement. 

Systemic movements may be subdivided into physiolog- 
ical and patliologicai. The movement from Australia just 
cited is physiological : i. e. it is a perfectly natural and neces- 
sary result brought about by normal conditions. Australia 
produces relatively more gold than it needs ; and therefore 
has a surplus which can advantageously be sold abroad and 
the proceeds used to buy other products. But, since gold is 
in Australia the standard metal freely coined by the govern- 
ment, the natural and easy way to market it is to take it to 
the mint, and make it a part of the monetary stock of the 
country. But such a continuous addition to the monetary 
stock means that that stock presently proves excessive and 
needs to be depleted. Consequently, the outflow which is 
spontaneously set up by this condition of things is a perfectly 
natural process, correcting a perfectly natural and inevitable 
excess, and is, therefore, a physiological movement. 

Pathological movements are those which grow out of 
abnormal or diseased conditions. Thus, the flow of gold 
from the United States after the suspension of specie pay- 
ments was pathological ; for it resulted from a malady in 



MOVEMENTS AND DISTRIBUTION II9 

the system. A system the paper mone}- of which is not 
beinpf redeemed on demand is (Hscased ; and various evil 
consequences are hkely In ensue, anions^ which is the loss 
of the stock of standard money. 

II. I'KINCII'LES. 

We have now before us the most important kinds of 
money movements. Let us proceed to set forth the chief 
principles regulating those movements. 

Principle i. The dealings of a eoiiiitry until other coitn-^ 
tries ill respect to goods and capita! do not eominonly lead 
to net uiovcineiits of money to or from the Urst country, 
until the claims for and against that country grozunng out 
of said dealings haz'c failed, for a measurable period, to '< 
balance each other. 

A very notable popular fallacy — one of the most wide- 
spread of those which have to do with economic matters — 
concerns the effect on a country's monetary stock of its 
dealings with other countries. It is constantly assumed 
that buying any goods or services from another country 
naturally means losing some of our stock of money to that 
country. If we give up producing some particular com- 
modity for the making of which we show comparatively lit- 
tle fitness, and go to buying that commodity from our neigh- 
bors, people at once bewail the fact as certain to draw away 
some of our money. They even go so far as to fancy that, 
if we allow perfect freedom of trade, all our money will be 
drained away. One of the chief reasons for setting forth 
the principle now before us is that it shows such anxieties 
to be, in part at least, needless. These anxieties will be still 
more thoroughly disposed of under Principle 4. 

The dealings of one country with another, or, more ex- 
actly, of the people of one country with those of another, 
do not in themselves lead to net money movements. They 
do so only under the condition named in the principle. In 



I20 CHAPTERS OX MONEY 

the first place, if international dealings were commonly ef- 
fected ivith money directly, there would be few or no net 
movements, assuming that we have in mind intervals of at 
least a few months in length. The reason is plain. No 
sensible person wants money for money's sake. Our neigh- 
1)()r is .-inxiMiis tn get our money by selling us his products, 
not in order that he may keep th.at money, but in order that 
lie ma\- use il to Imy our products. This is plain within 
the limits of our ow n town ; and in no essential respects 
does the trade within the town differ from the trade be- 
tween it and other towns, or from the trade between the 
country as a whole and other countries. The merchant in 
Detroit wants the money which he gets from Ann Arbor 
people for no other purposes than the money which he gets 
from Detroit people ; that is, to use in buying flour, celery, 
raspberries, and other things, many of which are produced 
in various places outside of Detroit, Ann Arbor among 
them. That is, we can be sure that, if trade between Ann 
Arbor and Detroit were carried on with money, that money 
which we sent to Detroit to buy goods, or an equivalent 
amount, would come back to buy Ann Arbor goods. In 
short, under normal conditions when trade is carried on 
with money, that money is like the shuttle in the loom ever 
flying forth and back, out and in, never tending to stay 
either in our town or the other town. Doubtless, even in 
normal times there will be temporary accumulations at either 
end. But we can be well assured that these will be only 
temporarv, quickly correcting themselves ; for in interlocal 
trade, as in home trade, money is wanted as pay for our 
goods only that it may be used in buying other peoples' 
goods. 

But, in the second place, under the regime actually pre- 
vailing in interlocal trade, it is a matter of course that 
movements of money do not take place save under the con- 
dition named in the principle. Indeed, it has already been 
fairly established in our preliminary analysis. Under mod- 



MOVEMENTS AND IMSTKl nUTlON 121 

ern conditions, the reciprocal claims and oblig'ations be- 
tween the dealers of different countries which grow out of 
their trade dealings are transformed into claims and obli- 
gations between the bankers or exchange dealers of those 
countries ; and, between these bankers, money itself actually 
goes only when their reciprocal claims fail to balance. We 
only need to add that such failure to balance must be of 
appreciable duration, a few weeks any how; since the first 
resort of an exchange dealer with an adverse balance will 
commonly be to borrow from his correspondent, — money 
being sent only when it becomes evident that the adverse 
balance is not going to be turned into a favorable one with- 
in a very short time. 

We have seen that the principle before us is true as 
applied to trade relations. We must now show that it is 
also true as applied to in-vcsfincnf transactions — thelendhig 
of capital by the people of one pl;uc to the people of , an- 
other place. In the first place, transfers of capital between 
communities, like trade payments l)etwcen communities, 
pr!jii;V!iy take the form of debts bcf-ieccji the bankers of the 
dJtferejit eoimiiimities. A person in England who lends 
capital to an American railroad, by purchasing its bonds, 
does not, in consummating the operation, send over money 
to that railroad. The bonds are paid for, just as cotton or 
wheat would be paid for ; i. e. either ( i ) by the New York 
broker's drawing a bill on London for their value or (2) 
by the London broker's sending a bill (draft) drawn by ^ 
some London exchange dealer on his New York correspon- 
dent. That is, payment for bonds — the lending of capital 
by English people to American railroads — /';; tJic first in- 
stance, takes the form, not of money sent, but of a debt 
created against some London house and /';/ favor of some 
New York house. 

We have learned, in the preceding paragraph, that, in 
its first stage anyhow, a movement of capital from one 
country to another means only_a_moye,mei?t of credit. But, 



122 CHAPTERS ON MONEY 

while such a shifting of capital does not mean a movement 
of money at the outset, would it not necessarily mean this 
ill the end? For transactions in capital, unlike trade trans- 
actions, are almost certainly one-sided. Europe lends to 
America ; but, generally speaking, America does not lend 
to Europe. The Eastern states lend to the Western, but 
the Western do not lend to the Eastern. In consequence, 
European exchange houses would never have any claims 
on American houses to balance those claims held by Ameri- 
cans against them which had grown out of the buying of 
American bonds — the lending of capital to American cor- 
porations. It would seem, therefore, that money would 
have to go. 

The above reasoning is plausible, but it overlooks one 
very important element. It is true that the debts of European 
exchange houses to American houses growing out of the 
shifting of capital to America, can not be matched by debts 
running in the opposite direction which hai'c the same ori- 
gin. But another alternative is possible. America by hy- 
pothesis has an abundance of claims on Europe due to the 
fact that Europe has purchased American bonds — lent 
America capital ; and, of course, America will insist on en- 
forcing these claims, using them to get something which 
she wants. Further, she may use them to get money. But 
7viU she? Is money the thing she wants? Probably not. 
Tlie real wants of borrowing railroads are, not money, but 
rails, cars, locomotives, etc. If they do not wish to buy 
these things abroad, they at least wish to have somebody 
use, in producing them here, labor and capital which must 
be released from the production of something else, by buy- 
ing that something else abroad. Accordingly, tjie_ posses- 
sions of an excess of claims on Europe is likely to increase 
America's purchases in Europe or in some place where 
claims on Europe are wanted. That is, the debt of Euro- 
pean exchange houses to American exchange houses aris- 
ing out of the fact that Europe is lending us capital, is like- 



MOVEMENTS AND DISTRIBUTION 1 23 

Iv to be matched with a debt of American houses to Euro- 
pean houses arisinf^ out of the fact that Americans Jmz/e 
bought from Europe more goods than usual."^'- In such case, 
of course, tliese debts will be cancelled and no money will 
go either wa\-. We are justified, then, in saying that invest- 
ment transactions between countries, like trade transactions 
between countries, do not of necessity involve correspond- 
ing movements of moncw 

We have seen that neither trade nor investment tran- 
sactions between countries necessarily invoke money move- 
ments, that they do so only when there is a fairly pro- 
longed balance of indebtedness one way. Our next task 
is to learn under what circumstances such a condition of 
things is likely to be realized. If for the present we con- 
fine our attention to trade relations, the answer is easy and 
will furnish our second principle. 

Principle 2. Any fact ti.'Iiich tends to cause the total 
7'oluiuc of goods or sen'ices bought by any commuuity froui 
other eouimuuities to reuiain for soiue time in excess of its 
sales to such other communities, will tend to bring about a 
net movement of money from ttie community whose pur- 
chases are in e.rcess: on the other hand, any fart which tends 
to make the sales of a community in excess of its purchases, 
tends to bring about a net mo^'cment of money into sucJi a 
community. 

The argument is too simple to need any considerable 
elaboration. The circumstances supposed will keep the 
exchange dealers of the community which buys more than 
it sells, for a considerable period the debtors of the exchange 
dealers of other communities. They will, therefore, find 
it necessary to send money to pay the balance ; since they 
can not profitably borrow from their correspondents for an 



* The argument can be reinforced in various ways. See Prob- 
lems 20 and 36, at the end of the chapter. 



124 CHAPTERS ON MONEY 

indefinite period. But such movements of money between 
the exchange dealers of different countries are obviously 
act movements, since there is no deduction to be made from 
them of movements having a similar origin and running in 
the opposite direction. Hence the circumstances supposed 
tend to cause net movements of money. 

It is hardly necessary to add that the conditions sup- 
posed would tend to cause a net movement of money in 
so far as trade is carried on with money itself, rather 
than with credit. If our trade is one-sided, if we are buy- 
ing in excess of sales or selling in excess of purchases, and 
doing this with money, so that there are both outgoing and 
incoming currents, the former will preponderate when our 
purchases are in excess, the latter, when our sales are in 
excess. 

This principle is illustrated almost every year in the 
trade between America and Europe. The exports of Amer- 
ica, being largely agricultural, are naturally "bunched" at 
certain seasons ; while its imports from Europe, l^eing more 
generally manufactured products, are distributed more uni- 
formly through the year. Consequently, temporary bal- 
ances against Europe are almost certain to appear in the 
fall season, and to lead to movements of money toward 
America. 

Another class of cases illustrating the principle are less 
regular in character. They arise when trade is much one- 
sided because of quite exceptional circumstances, which 
compel one country greatly to increase for a time its pur- 
chases from foreign countries, though during the same per- 
iod it can not greatly increase its sales to those countries. 
In such case, a large balance of indebtedness will appear 
against its bankers ; and money in large amounts will go 
to make good these balantes. Thus, in 1879 the wheat 
crop of France failed, compelling her people to make more 
than commonly extensive purchases in America. As ex- 
ports from France did not increase so rapidly, a large amount 



MOXICMliXTS AXD DISTRIBUTION 1 25 

of gold had to go to settle the balance against that country. 
Similarlv. when japan was engaged in the recent war with 
Russia, it was obliged to increase its purchases abroad more 
rapidlv than its exports could be increased. It, therefore, 
had to ship gold, or borrow it in Kiu-ope and America, to 
make good the balance against it. 

Corollary i. There tends to be a uiovciiicnt of mon ey 
into aux district or country of exceptionally I oiv prices mid 
vice Tcrsa. 



This obviously follows, because the low prices cause a 
temporary excess of purchases from the country or district 
in question over sales to that district or countr}-. 

Corollary 2. There tends to he a net movement of mon- 
c\ into an agricultural distric t or coiinlry at the time of the 
harvest. 

The reason has already been sufficiently developed. 

W'q have disposed of the most common class of those 
causes which tend to bring about money movements ; viz., 
those contlitions which tend to make the trade between a 
countr\- and its neighbors for a considerable time one-sided. 
The second set of general causes which have to be com- 
niented on arc connected with ini'cstment transactions. 

As we learned in Principle i, investment transactions 
do no^ necessarily cause movements of money, — the trans- 
fer of capital from Europe to America does not necessarily 
involve the transfer of money from Europe to America. In 
fact, it seems probable that the majority of the shiftings of 
capital fail to cause a shifting of money. But this is be- 
cause the process is so slow that there is time to effect an 
offsetting of the exchange balance created by the movement 
of capital against the lending country, through the natural 
readi'ustments of trade, — the expansion of imports into the 
bojTOwing country. 

Rut it Ts always possible that the movement of capital' 
from countrv to country will be too large and too rapid to 



126 CHAPTERS ON MONEY 

permit the restoration of a balance of exchange by trade 
readjustment, //; time to avoid the sending of money. For 
this, there are at least two reasons. First, it takes time to 
readjust trade so as to utilize in buying foreign goods the 
increase in the borrowing country's stock of credit on for- 
eign countries, and so takes time to develop exchange claims 
on the borrowing country. The people who are doing the 
borrowing from Europe are c[uite likely not the persons who 
would naturally increase their purchases from Europe. The 
changed conditions of trade must, therefore, become known 
t(^ the importers of foreign goods ; they must become con- 
vinced that they can sell more goods at a good profit ; they 
nuist arrange for the ordering of the goods ; and so on ; — 
all of which takes time. But, secondly, international ex- 
change houses are not accustomed to give each other long 
credits. They deal in vast sums on a very small margin of 
profit. Rather than lose the use of their capital, if only for 
a few weeks, they will order the gold shipped. According- 
ly, a movement of capital, which is at once rapid and of 
large volume, is quite likely to cause at least a temporary 
movement of money in the same direction ; even though 
that movement will a few months later be ofifset by a move- 
ment in the opposite direction, due to excessive imports by 
the country which only a little while before was receiving 
the money. This point formally stated gives us Principle 3 

Principle 3. Any cause iclu'ch fends to bring about a 
rapid and large net inoi'eincnt of capital from one country 
^^or~ district to another, tends to effect a net movement of 
money in the same direction. 

Corollary i. lltere tends to be ajiet movement^ of mon- 
ey to an\ country or district where the rate of discount is 
for the time being exceptionally high. 

Thus, if the rate of discount in London is raised till it 
is two or three per cent higher than in Paris or Berlin, 
bankers having connections in London will hasten to avail 
themselves of this opportunity to make exceptional profit 



MOV'EMENTS AND DISTRIBUTION 1 27 

by transferring" funds to London. Naturally, they will just 
as far as ])ossible use exchan.g'e or credit for this purpose. 
But it is likely that such action will soon exhaust the avail- 
able supply of credit, in which event, if the movement keeps 
on, mone\' must be sent. 

Corollary 2. There fends to be a net ino:'ci)ient of mon- 
ey to any country or district z^.'liere the ol^portunitics for the 
profitable iincstnient of capital are for tlie time beim^ ex- 
ceptionally nnineroiis as compared icith those of the country 
or district from 7cliicli tlie moi'cment tatxcs place. 

The reasoning here is not materially different from that 
used in the preceding case. While the rate of discount may 
not be high in the place to which money goes, may be even 
lower than the rate in the place from which money is sent, 
the opportunities in the former are much more numerous. 
Capital, therefore, tends to move in order to improve these 
opportunities. But the shifting of capital almost certainly 
leads to the shifting of money. 

A notable illustration of this principle is found in the 
relations of the western and southern portions of the United 
States, on the one hand, and the chief centers of trade and 
banking, on the other. After the crops of the summer and 
fall have been marketed, the outlying communities have too 
little employment for the considerable stock of money which 
has been. needed to move the crops. The home rate on such 
loans as bankers actually make, may be six or eight per 
cent ; but a large share of their funds can not be lent at all. 
They, therefore, ship this idle money to their correspondents 
in the great centers, where they can get at least one and a 
half, or two, per cent for its use. 

Corollary 3. There tends to be a net movement of mon- 
ey from any country or district zvhere the opportunities for 
profitable investment have experienced a marked decline. 

The reason is evident. 

Corollary 4. Money is likely to be ex ported, from any 
country on the eve of a grave national crtsTs. 



128 CHAPTURS ON .MO.MiY 

The approach of war. or the first serious reverse after 
war has come, furnishes the most typical case. The reason 
is evident. Tlie approiLch of a ^rcat national crisis _^causes 
uncertaint}- and anxiety with respect to the maintenance of 
credit and the continuance of_ profitable business operation.s. 
J 'nulent capitalists hasten to guard themselves against pos- 
sible loss bv transferring their capital to countries free from 
the impending" danger. The movement is soon general, and, 
therefore, so large and rapid that money must almost in- 
evitably be sent. 

Corollary 5. Any considerable uncertainty zvitJi rcspccL 
to the maintenance of the monetary s tandard i s likely to lead 
to an e x port of money. 

i'hus, ii it looks very probable that a nation will resort 
to irredeemable paper, or go from a gold standard to a much 
lower silver standard, money is likely to be exported in 
large amounts. The reason is plain. If such a change 
should be made, creditors generally will find their claims on 
debtors cut down by an amount corresponding to the change 
in the value of the standard.* Naturally enough, creditors 
will seek to guard themselves against such a possibility by 
transferring their capital to other lands. Their haste to do 
this will make the movement of capital very large and rapid ; 
and will almost certainly necessitate the sending of money. 

In introducing Principle i of this chapter, I called at- 
tention to some popular fallacies with respect to the efifect 
on a coinitry's monetary stock of its dealings with other 
countries. In that connection, the point particularly com- 
batted was that every purchase abroad means the loss of 
some money. I wish, now, to go into this matter a little 
more deeply, and show that, generally speaking, all anxie- 
ties of this sort are entirely needless, that, save in special 



* Save in so far as any particular creditor has a statement in 
his bond stipulating payment according to the old standard. 



MOVEMKNTS AND DlSTKlDUTlON 1 29 

cases to be explained later, money drains can safely be left 
to correction by natural causes. The principle is as follows. 

Principle 4. Every net iiiorciiim/ of iiioiicy feuds to /'A 
sfof>pcd. or rvni reversed, by the automatic reversal of that' 
couditio u ichieh is necessary to briui!^ it about, or b\ the'- 
action of coiiditii)us i^'hich its otcu continuance establishes.^ 

First, the movement may be stopped by the automatic 
reversal of that condition which is necessary to bring it 
about. To establish this contention, it will be necessary to 
give a little fuller explanation of "exchange" than we have 
yet attempted. Let me once more remind the student, of 
the now familiar fact that settlement between the merchants 
of different countries is made, ,not directly, but through 
the assistance of exchange dealers. That is, the claims of 
each community on other communities growing out of their 
mutual transactions, get into the hands of their exchange 
dealers, who settle with the exchange dealers of the other 
communities. Now, this inevitably means that there is de- 
veloped a regular traffic in such claims, i. e. they are bought 
and sold like flour or iron. Every day the prices of such 
claims per unit of value are quoted in every important 
newspaper. Like the prices of other things, t he price o f 
"exchange," — which is the name given to a claim or right 
to receive money in another country — rises and falls, ac- 
cording as the demand rises or falls, or as the supply falls 
or rises. Thus exchange on London ranges from about 
$4,835 per English sovereign to about $4,895, its natural 
par being $4,866+. If we are selling Europe nnich more 
than we are buying from her, so that claims on Europe are 
very abundant in New York, London exchange will drop 
to, say, $4.84 or $4,835. If, on the other hand, we are buy- 
ing much more than we are selling, so that the demand for 
claims on Europe is very much greater than the supply, the 
price will go up to, say, $4.89 or $4,895. 

But not only does the price of "exchange" rise and 
fall, these risings and fallings have a vital relation to the 



130 CH AFTERS ON MONEY 

movements of gold. Looking at the most proximate deter- 
mination of the matter, the going or coming of gold is en- 
tirely a matter of the price, or rate of exchange. If the 
rate is as high as $4,895. this means that there is on the 
market practically no exchange having its origin in sales 
bv us to the rest of the world ; so that, if any is wanted, 
it must be created by sending gold. This rate further 
means that the exchange dealer can afford to send gold in 
order to create exchange which he can sell at the prevail- 
ing price ; for, at that price, he will get his money back 
with a fair profit.* Below that point, however, e. g. at 
$4,885. he could not afford to send gold for this purpose; 
since the cost added to the natural price of the bullion, 
$4,866, would exceed the price obtained for the exchange, 
sold against his shipment. Accordingly, if anything hap- 
pens, when exchange is at $4,895, to make the supply abun- 
dant and bring down the price, the exporting of gold for 
exchange purposes will at once become unprofitable and, 
hence, will at once cease. 

Bvit let us take another step. No^pnly docs the ex- 
porting of gold depend on the rate of exchange, this is also 
true of the exporting of goods. The rate which makes it 
profitable to export gold also makes it more than usually 
easy to export goods, to induce foreigners to buy goods. 
Thus, suppose you are a wheat exporter and hope to make 
a 10,000 bushels sale to a certain Liverpool miller. If you 
do so, you will have ready for sale to your banker a draft 
on your customer for, say, £1650. Now, if with exchange 
at par the proceeds of this draft, $8028.90, would give a 
fair profit on the deal, it is plain that with exchange at 
$4,895 they would give you an additional profit of $47-85- 
Plainly, then vou could afford to shade the price a little in 
order to make a sale more likely, i. e. you could offer a 



* Hence this rate, $4,895, is called the gold-export point. The 
exact figure varies from time to time. 



\ MOVEMENTS AND DISTRIBUTION I31 

\price of 80 cents rather than one of 8oj4 cents. And I 
hardly need say that, in large transactions of this sort, a 
difference oi y^ oi a cent, or even >^ of a cent, often de- 
termines for. or against, a sale. It follows, therefore, that 
a high rate of exchange acts as a stimulus to increase ex- 
ports. 

But what, now, will be the consequence of the increase 
in exports due to the high price of exchange? Manifestlv, 
those exports will put some foreigners in debt to us, will, 
therefore, increase the supply of claims on other countries, 
i. e. of exchange. But, in increasing the supply of exchange, 
they will tend to lower the rate of exchange till it is less 
than $4,895. But this is the rate necessary if gold is still 
to be exported. Hence the increase in exports due to the 
high rate of exchange will tend to stop the export of gold. 

The chain of reasoning is now complete. The gold can 
not go until exchange reaches a ver\- high rate. Biit a 
high rate of exchange stimulates exports ; the increase in 
exports presses down the rate of exchange; and the lowered 
rate of exchange stops the outflow of gold. That is, as 
affirmed by the princii)le before us, the outflow of money 
tends to be stopped by the automatic reversal of that con- 
dition which alone makes it possible. 

The above argument was directed to establishing one 
part of the principle before us. Let us now show that the 
other part is true. A persistent net movement of money 
tends to be stopped or even reversed "by the action of 
conditions which its ozvn continuance establishes." In other 
words, a_^money drain is self-corrective. 

The first way in which a money drain puts a check on 
itself is to cause an inflow of floating capital, — i. e. a kind 
of capital controlled by the quasi-international banking or 
exchange houses of such centers as London, Paris and New 
York which they constantly shift from country to country, 
as greater or less profit is anticipated. The process bv 
which a money drain tends to cause an inflow of this capi- 



132 CHAPTERS ON MONEY 

tal and so to stop itself is the following. First a money 
drain from any country, — which will of course be a drain 
from its chief commercial and banking center, — tends to 
make the stock of money in that center relatively small. 
This will affect especially the surplus reserve of the banks, 
since it is from this reserve that the money for export will 
be taken. But, secondly, this depletion of the surplus re- 
serve will tend to raise temporarily the rate of discount* on 
short-time loans ; since the rate on this sort of loan is al- 
most entirely dependent on the size of the surplus reserve. 
Thirdly, the high rate of discount, thus established, will 
make the country a desirable market for lenders, and so 
will tend to draw in the floating capital of neighboring 
countries. But, finally, as such a movement must in the 
nature of the case be a rapid one, it will almost necessarily 
stop the gold drain, if it does not set up a counter move- 
ment. 

This is the first way, then, in which the outflow of mon- 
ey tends to check itself. It makes money scarce, which 
makes discount high, which causes the inflow of capital 
(or stops its outflow), which jn the end stops or checks the 
outflow of money. In ordinary cases, this process is ade- 
quate to stop an excessive drain. But, if it does not prove 
to be so, a new and slightly different series of reactions fol- 
low and usually effect the desired result. 

Under modern conditions, there are many securities, 
stocks and bonds, having an international character, i. e. of 
such a standing that investors in different countries make a 
practice of buying them whenever the conditions are favor- 
able. Now, the prices of such securities are soon affected by 
the causes which, as we saw above, led to the inflow of float- 
ing capital and, so, to the inflow of money. That is, when the 
bank reserves of New York become scanty and the rate of dis- 
count rises, if this be long enough continued, it quite prob- 



* That is, interest collected in advance. 



MOVEMENTS AND DISTRIBUTION J33 

ably leads to a fall in the price of securities. For a large 
part of the buying and owning of securities at any moment 
is based on borrowed capital ; and, therefore, if money is 
hard to get, the inclination of people to buy these securi- 
ties, or even to hold them, is diminished. In consequence, 
the demand falls off, perhaps the supply increases, and in- 
evitably their prices will fall. But, if the prices of securi- 
ties fall, foreigners will be encouraged to buy them. In 
turn, this buying by foreigners will give New York a sup- 
ply of exchange on Europe. As a result, the rate of ex- 
change will fall below the gold point, thus making its ex- 
port no longer profitable. Thereupon the drain will cease ; 
and, if the buying of New York securities goes far enough, 
it will be replaced by an opposite movement. 

Thus we have a complete chain of causes set in motion 
by the outflow of money itself which inevitably effects a 
stoppage of that outflow ; outHoi^' of money cau^s^ ( i) lozv 
bank reserve w hich causes (2) /;/-^/; rate of diseoiinT^hich. 
cause s (3) prices of securities to fall which causes (4) for- 
eign buying which causes (5) abundant e.vcliange which 
ca_usL-s ((>) (/ fall in the rate which causes (7) a stoppage of 
the outHoic. 

There is yet a third chain of causation which comes into 
operation, probably a little later, than the others. The same 
high rate of discount which causes a fall in securities, if 
long enough continued, leads to a fall in the prices of the 
great export staples, such as cotton and wheat, which are 
speculated in like securities, and this fall in price leads to 
increased buying by foreigners, which makes foreign ex- 
change abundant, which lowers the rate, which checks the 
outflow of money. 

Finally, it is perfectly certain that, if the outflow could, 
and should, go on long enough to produce a scarcity of 
money in the country as a whole, — a general scarcity, — ■ 
there would result a general fall in prices which would 



134 CHAPTERS ON MONEY 

stimulate foreign buying all along the line, until the direc- 
tion of the money movement was completely reversed. 

Corollary. There is never any danger that an export . 
of money :eill go on till a country is denuded of money. 

We have just seen how money movements tend to be 
stopped or even reversed automatically. There can be no 
doubt that this tendency would triumph over opposing ten- 
dencies, long before a country was denuded of money, in 
fact, long before its stock had been materially depleted. 
Thus, the banks of Kew York rarely have a surplus reserve 
of more than 25 or 30 millions, commonly less than half 
this. A very moderate export movement will soon reduce 
the surplus to zero, or even change it to a deficiency. With 
such a deficiency, money capital commands a famine price, 
and an outflow of money is simply impossible. 

We have just seen how unfounded is the fear sometimes 
entertained that a country may be entirely denuded of 
money. We will now take a long step further, and say 
that, under normal conditions, there is no danger that a 
particular country or district will have less than its fair 
share of the world's stock, as determined by the relative 
needs of different countries or districts. This statement 
rests on the following principle. 

Principle 5. Generally speaking, the money stock of a 
country, or of a group of counti-ies having the same stand^ 
ard, tends to distribute itself according to need. 

The argument for the principle, stated in general terms, 
is this. If the need of any particular community, as com- 
pared with other communities, is less Completely satisfied, 
this fact alone will tend to bring about a process of redis- 
tribution, which continues till the several needs are satis- 
fied in equal measure. The explanation of the process by 
which this is brought about has already been anticipated, in 
discussing the preceding principle. First, if the stock of 
money in one country, as compared with another, is small 



MOVEMENTS AND Dl STKI MUTlON I 35 

relatively to the money work to be done, this fact will show 
itself in deficient hank reserves, which will cause ihejrate 
of dis count to rise , which will tend to bring about an in- 
flow of money. (Principle 3, Corollary 1.) Af^^ain, the high 
rate of discount, due to a relative scarcity of money, will 
cause the prices of secu rities and of the great staples to 
fall, which will tend to cause an intlow of mone\- under the 
operation ot Uorollary i. Principle 2. 

The above explanation shows us how a deficiency in 
one country automatically corrects itself by causing an in- 
flow from another country. The processes by which an 
excess in any country is corrected by an outflow to other 
countries is simply the reverse of those described. First, 
such an excess causes a low rate of discount, making in- 
vestments unprofitable, which causes capital to be exported, 
which presently takes money out. Secondly, an excess of 
money makes prices high, which tends to cause an export 
of money under the working of Corollary i. Principle 2. 

Corollary i. There tends to be a [persistent net move- 
ment of money or bnllion from districts or countries f'ro- 
diwiirj^ standard money metal, toieard those not producing 
it, but Ita-eing the same standard. 

Here is the argument. Generally speaking, any coun- 
try's output of standard-money metal is marketed at the 
mint and. so. is added to the monetary stock of the country. 
In consequence, that monetary stock will commonly be ex- 
cessive, as compared with the stock of other countries. Con- 
sequently, from such a country, money will tend to flow 
more or less continuously into other countries. 

This proposition needs emphasis chiefly l^ecause it 
shows the folly of undue anxiety respecting an average ex- 
cess of gold exports in the case of a nation producing a 
large amount of gold. We should expect, as a matter of 
course, that the custom house reports of the United States 
or Australia would show them exporting more gold thaii 
they import ; since gold is one of their important products. 



136 CHAPTERS ON MONKY 

which they naturally use to buy things which they can not 
produce so easily, just as they use cotton or wheat or wool. 
In fact, the United States exports gold much less contin- 
uously than would naturally be expected ; probably because 
its rapid growth in population and business makes work at 
home for a large part of its increased stock of gold. 

Corollary 2. The rapid issue by any goi'eninient of a^ 
large amount of legal fender money, or ei'cn flic mere pres-^ 
'"ence of that money, is likely to resulf in an onfflow of sfand- 
ard money. 

Thus the 378 millions in silver dollars and the 155 mil- 
lions of treasury notes, issued by the government of the 
United States between 1878 and 1893, must in itself have 
tended to cause an outflow of gold. 

The argument for the principle is evident. First, under 
the policy supposed, the stock of non-standard legal tender 
money is always liable to become excessive, i. e. greater in 
amount than the uses to which it can be put. Secondly, the 
kind of money in question being inelastic, the excess can 
not be relieved by its contraction ; and, therefore, the sfock 
of money i)i general tends to become excessive. Thirdly, 
an excess in the stock tends to bring about a redistribution 
through the export of money. Finally, if any money goes, 
it must be standard money ; since this only is acceptable to 
the foreigner. 

Corollary 3. /;; the industrial depression zvhieh usually 
follozvs a panic, there is likely to he a considerable net move- 
ment of money from the country experiencing such depres- 
sion.'^ 

The industrial depression causes the old stock of money 
to be excessive as compared to the need for it. If this ex- 
cess is promptly relieved by the contraction of some non- 
standard portion of the stock, no export will follow. But, 
if, as is more commonly the case, the non-standard money 



* Cf. Corollary 3, Principle 3. 



MOVEMENTS AND DISTRIBUTION I37 

is lacking in power to contract, the excess must be relieved 
by export, and for this purpose only standard money will 
be taken. 

An evident inference from the last principle and its cor- 
ollaries is that, under a well-devised system, there will be, 
in normal times, no need for interference by the govern- 
ment or any other institution to insure to each countrv or 
each district its proper share in the monetary stock. In- 
deed, speaking generally, it is agreed by all specialists that 
nine out of ten of all efforts to interfere with the automatic 
distribution of money work more harm than good. Still, 
this, like most general principles, has exceptions, or at least 
limitations which almost amount to exceptions. On ac- 
count of the importance of these exceptions, I shall present 
them in the form of independent principles. 

Principle 6. As between older and richer communities, 
on the one hand, and nezver and poorer communities, on the 
other, the money stock tends to distribute itself so thai the 
newer and poorer communities are less adequately furnished 
considering their absolute needs. 

In this principle, we have the explanation of much of 
the monetary history of America from the earliest times to 
the present day. For nearly three hundred years, some part 
of the country has been a frontier district, i. e. a district 
new and poor. As such a frontier district, it has from the 
nature of the case been scantily supplied with a medium of 
exchange, and has made all sorts of efforts — some of them 
quite foolish — to remedy the evil. Something, perhaps, 
might have been done to help matters. But, in a general 
way, the difficulty was one which only time could remedy. 
The undesirable distribution was natural and inevitable. 

It is only this historical significance of the principle be- 
fore us which justifies its being put forward as an independ- 
ent principle. For, in reality, it is a qualification of Prin- 
ciple 5, and a qualification which is already assumed in 
stating that principle. That is, the word "need" in such 



138 CHAPTERS ON MONEY 

economic propositions does not mean absolute need. When 
it is said that the natural working of economic laws distri- 
butes cotton or wheat or beef according to need, it is not 
meant that a poor country gets its need for any one of these 
suppHed as fully as a rich country does. What it means 
is that the poor country gets what would be its natural share 
of the output of the product in question, — the share which 
would naturally fall to it. fakiiii:^ into account its total re- 
sources. Such a share equals its effective need for the 
thing in question, the degree of need which it can properly 
attempt to satisfy. 

The truth of the principle before us could be shown by 
an appeal to history. But the causes at work furnish suffi- 
ciently convincing evidence. New and poor distrjrts can. 
not expect to be amply supplied with a medium of exchange, 
just because they are new and poor. A stock of money no 
more comes by magic than good roads, paved streets, pala- 
tial residences, and so on. Like all other good things, it 
costs something. If a frontier commvmity is determined to 
have an abundant stock of money, it must go without some 
other form of wealth. But, from the nature of the circum- 
stances, there are in such a case many other things more 
truly indispensable than money. Such a community needs, 
most of all, live stock, plows, reapers, stoves, chairs, tables, 
etc., — the foundation goods of civilized life. Naturally it 
uses most of its bu\ing power with older communities to 
purchase, not money, but these more elementary necessi- 
ties. Without a common understanding, but still with 
pretty general concert, such a community tries to get on 
without the expensive money of older communities. At 
first, it accomplishes this by a resort to barter. Next, it 
substitutes, for the specialized money of older communities, 
some commodity which serves as money at the same time 
that it continues to be goods ; for example, corn, cattle, to- 
bacco. A little later, the community tries to invent some 
cheap substitute for ordinary money. It is at this stage. 



MOVEMENTS AND DISTRIBUTION 1 39 

that the real trouble begins. For more harm is g-enerally 
wrought by the badness of the new money than the gain 
from having an abundant stoek of it. P.ut, whatever the 
outcome of these experiments, the proposition, that newer 
and poorer communities will naturally have a scantier stock 
of money than they could well use, is evident enough. 

Principle 7. The money of a country Icmls. in a nicas- 
it re, to iiravitg tc to The cente rs _ oflradc, particularly the 
chief center , so that special efforts se em necessary to keep 
outlxim : districts supplied. 

This principle teaches that, for the distribution of money 
between the great centers and outlying districts, we can 
not entirely depend on the working of automatic processes. 
Some conscious interference is necessary to keep outside 
districts adequately supplied. As soon as money's work in 
the country districts is done, it naturally gravitates back to 
the city. 

One of the most notable and important illustrations of 
this principle is the fact already alluded to, that every sum- 
mer money has to be drawn from New York, and other 
centers, "to move the crops." This experience of the coun- 
try as a whole is duplicated on a small scale between every 
trading center and the territory immediately dependent upon 
it. For example, some years ago in a certain Michigan vil- 
lage which had a factory with a pay-roll of $2,000 per 
week, it proved necessary for the local bank to bring out 
the $2,000 in cash from Detroit, practically every week in 
the year. That is, the $2,000 having been paid to the 
workmen, instead of remaining in the village ready for use 
the next week, before the time was up found its way into 
Detroit, from which it had to be taken back by the banker. 

Another rather striking illustration of this principle 
comes from the Copper Country of Michigan. There the 
banks are every month called upon by a great mining com- 
pany to furnish many thousands of dollars in fifty-dollar- 
bills, and these bills have to be shipped in from Chicago or 



140 CHAPTERS ON MONEY 

New York, not once but every time. This seems very 
strange. One would suppose that those bills which were 
shipped in, and used, in January would drift back to the 
banks and be ready for a second job in February. But not 
so ; when February comes around, the bills have all dis- 
appeared, and the operation of shipping in has to be re- 
peated. And this goes on indefinitely. 

Coming, now, to the explanation of the tendency brought 
out in the principle, we find two or three causes at work. 
First, money which has become temporarily idle naturally 
gravitates toward the point where the chances of profitable 
temporary investment are most numerous. (Principle 3, 
Corollary 2.) Now, a country bank lias practically no 
opportunity to make really temporary loans, — call loans, 
loans which must be paid back whenever called for after 
one day. On the other hand, a great city with vast markets 
where speculation in stocks, bonds, and the great staples 
is carried on daily, can ordinarily utilize millions in de- 
mand loans. Accordingly, there is always a chance, at least, 
that money which is only temporarily idle will be able to 
find employment of some sort in the great trade centers ; 
while, if left in the country, its failure to get employment 
is certain. Hence such money naturally gravitates to the 
great center. 

A second reason for this tendency of the money stock 
to gravitate to the great centers is found in the fact that 
the non-banking movements of money are preponderantly 
toward these centers. By non-banking movements I mean 
those movements which are effected without the interven- 
tion of banks, such as the sending of money through the 
mails by buyers of goods, the carrying of money by travel- 
lers, shipments between postofifices or different agencies of 
express companies, and so on. Doubtless the comparative 
volume of this class of movements tends to decrease, and 
the task of moving whatever money has to move, tends to 
pass into the hands of banks. But the quantity of such non- 



MOVEMENTS AND DISTRIBUTION 141 

banking movements is still considerable and has a very no- 
table influence on the distribution of the money stock, in 
that it usually shows an excess toward banking centers. 
For this there are several reasons. 

Thus, travel in any district is bound to bring some cash 
into that district, even though larger sums be carried in the 
shape of drafts and letters of credit. But t her.e-will be m ore 
travel, .-is a rnlt;'. fraui the, country tovyn tfi^TI 7nr^_jrfrxrr, • 
and. besides, it will be of a sort which depends more on 
cash than does city travel. Again, shoppers — persons mak- 
ing retail purchases — always carry some cash, and shoppers 
always go from the country to the city rather than from 
the city to the country. In like manner, there will be a 
considerable volume of retail buying from the city by mail 
orders, and this will be paid for, in some measure, by send- 
ing cash. On the other hand, the city buyers of the few 
exports of a country town almost universally pay for them 
with credit media of exchange rather than money. Or, 
speaking more precisely, the local buyers of produce, when 
they in turn sell to the great centers, collect their pay by 
means of credit, i. e. bills of exchange. Still another reason 
for the drift toward the city is to be found in the fact that 
great corporations doing business everywhere, e. g. rail- 
ways and express companies, as a rule keep their bank ac- 
counts only in considerable cities. As a consequence, the 
local agent in a village ships his money receipts into some 
neighboring city. 

Principle 8. IVhile in general the proper distribution of 
the zvorld's stock of standard money among the different 
countries can safely be left to th^ u'orking of automatic pro- 
cesses, circumstances may arise under which it is desirable 
consciously to control particular movements of money, in 
order to maintain the stability of the system of credit. 

In Chapter II, we learned that, in a typical monetary 
system of our day, a large part of the total monetary stock 
consists of various kinds of representative, or credit, money. 



142 CHAPTERS ON MONEY 

Fur. her, though the matter has not been formally discussed, 
we may assume the student to be familiar with the fact 
that a still larger part of the total circulating medium con- 
sists of something which is not money at all but only bank 
credit.* Xow. it is plain that, under such an order of 
things, the foundation of real money, on which the whole 
system rests, is vastly more important than any other con- 
s ituent of the circulating medium. It is not mere money ; 
it is emphatically the basis of the whole system. This is 
particularly true of that portion of the stock of such money 
which constitutes what in Chapter II we called the ultimate 
rcscri'c.f To maintain this ultimate reserve in adequate 
volume is of the greatest importance, not because we need 
it as a medium of exchange, but because, if it goes, the 
yyh ole s ystem falls in ruins. This being true, an export of 
standard money or bullion is not simply an export of money, 
— rather it is, or at least may become, the export of the 7'ery 
foundation of the monetary and credit system. So that 
one might almost compare a country wdiich at a critical time 
is exporting standard money, to a dealer in building stone 
who should set about selling the foundation of his own 
house. 

Accordingly, it is perfectly natural that every consider- 
able movement of standard money should be jealously 
watched with reference to its possible bearing on the ulti- 
mate reserve of the system. When that reserve is being 
drawn down, it is not enough to say that, in the long run, 
any excessive drain will correct itself. We can not afiford 
to wait for the long run. Too serious consequences may 
come in the meanwhile. We must anticipate the working 
of nature's forces. The processes by which she automatic- 
ally corrects the drain may consume considerable time. In 



* This mode of expression is of doubtful precision; but it is 
jnst at present the conventional one. 

t See page 73. 



MOVEMENTS AND DISTRIHUT ION I43 

the interim, the reserve might (Hsappear altogether, or at 
least suffer serious depletion. The disappearance of the 
ultimate reserve would mean the overthrow of the stand- 
ard. Even its serious depletion would excite such anxiety 
in the business world as seriously to injure industry and 
perhaps precipitate a panic. Thus, it might easily be the 
duty of the government, or the great central bank, to take 
active and vigorous measures to check an outflow of stand- 
ard money. 

A specially important case in application of this prin- 
ciple arises when the drain is due to statutes, or other arti- 
ficial conditions, which at the verv best can not be chan^red 
for a considerable time. In such circumstances, temporary 
measures — "stay" measures — are imperatively demanded. 
Something must be done to preserve our stock of standard 
money, till we have had opportunity to remedy the cause of 
the difficulty, or to diminish the evil results, if the causes 
are such that removal is impossible. Thus, under the svs- 
tem of the United States as it existed prior to 1900, it 
seemed quite impossible during two or three years to main- 
tain our ultimate reserve without resorting to the very 
heroic policy of borrowing gold on the open market, and, in 
one case at least, specifying that none of it should be drawn 
fro'.ii the Treasury and one-half should be imported from 
Europe. That we shall ever again be obliged to go so 
far max be doubted. But we are by no means out of the 
woods. 

A very peculiar case calling for interference mav arise 
when a nation finds itself experiencing the specie drain 
incident to a great war. (Principle 3, Corollary 4.) For 
example, after the opening disasters of the war of 1870, 
France found that the specie of the great bank reserve was 
being drawn out for export. Unwilling to lose this great 
stock, she directed the Bank to cease making specie pay- 
ments. This policy was of course seriously objectionable 
in that it involved a temporary overthrow of the standard of 



144 CHAPTRRS ON MONEY 

value, and a setting up of a fiat money standard ; but it 
stopped completely the outflow of specie, and this, in the 
opinion of the government, was the immediate object of 
greatest importance. Further, the paper money was so 
judiciously handled that the change in the standard was 
comparatively small, and the evil efl^ects resulting therefrom 
were quite insignificant. 

Principle 9. Any metallic money which has been driven 
out of circulation under the zvorking of Principle "j, Chap- 
ter III, tends very soon thereafter to leave the country as 
7cell as tlie circulation. 

In Principle 7, Chapter III, was brought out the point 
that a money which has a value in some other relation 
greater than its nominal value as money, is almost certain 
to leave the circulation. The principle before us adds that 
when such a money is a metallic one, as is usually the case, 
it also tends to leave the country. 

Numerous illustrations of this principle are furnished 
by the history both of Europe and the United States. One 
of the best is to be found in the experience of France dur- 
ing the years immediately following the Calif ornian and 
Australian gold discoveries. At that time France had a 
bimetallic system; and her mint ratio, i to 15.5, overvalued 
gold by 2 or 3 cents in the dollar. As a consequence gold 
became the standard and silver went out of circulation. 
But it also left the country. For, although France normally 
imports silver, yet between 1852 and 1864 her net exports 
of that metal amounted to about $345,000,000. 

The reasonableness of the principle is made evi- 
dent by a consideration of the causes at work. 
First, by hypothesis the money in question is out of 
circulation and, so, is mere bullion — a metal, not money. 
P)Ut, again, this changing of such a quantity of silver or 
gold money into silver or gold bullion inevitably makes the 
stock of such bullion altogether excessive for the uses to 
which it can now be put. In consequence, the value of 



MOVEMENTS AND DISTRIBUTION 1 45 

bullion in the country where it has experienced this chang^e, 
as compared with its value in neighboring- countries, is low- 
ered. That is. the premium which it probably bears in 
the home country is not high enough to cover the ditTer- 
ence between its nominal value as money and its value in 
other countries. Export is now inevitable. It will go to 
the countries where its value is the greater. 

I will close this chapter with two empirical principles 
respecting actual monetary currents in which the United 
States has especial interest. The explanation of them, J 
will leave to the student. 

Principle 10. Between America and Europe there is] 
usually a net iiwveinent of money toward Europe during '^^ 
the second quarter of the year, tozvard America during the ) 
third and fourth quarters. 

I'rinciple 11. Between Xew York City, as the banking 
center of the United States, a)id the country at large, there 
arc usually two pairs of great money movements, each hav 
ing an inward (tow^ard New York) and outzvard (from 
Xew York) )nember. The lesser pair has its outzvard iiozv 
in the late z^'inter or early spring, and its reflu.v in the late 
spring or early summer. The great pair has its outzvard 
flozv in the summer and autumn, and its refln.v in the late 
fall or early zvinter. 

PROBLEMS. 

T. Make a table showing the net movement of money 
between New York and the interior for each week from 
July I to December 31 of any recent year. The Commercial 
and Financial Chronicle will furnish the facts. 

2. There was a large net import of gold into this coun- 
try during 1880 and 1881. How do you explain that fact? 

3. The Michigan Milling Company of Ann Arbor sells 
flour to the value of $250 to Henry Long and Co.. of Pough- 
keepsie. X. Y. : and collects payment by making a sight 



146 CHAPTERS OX MONEY 

draft on Lon_<;". which it deposits for credit in the First Nat- 
ional Bank. 

(a) Write out the draft. 

(b) Trace the probable course of the draft from the 
First National Bank till it is collected. (See Banking Ex- 
hibits in Library.) 

4. In connection with the postal order business, the 
Ann Arbor office has much more occasion to collect from 
the New York office by draft than it has to remit to that 
office. What do you suppose is the explanation? 

5. The express companies and the post-office in Ann 
Arbor are competitors of the banks in the business of fur- 
nishing the public with the means of making remittances 
to distant places. Yet these institutions have no trouble 
selling to the banks at par, drafts on their New York offices. 
What do you suppose is the explanation? 

6. "The exchange market was well supplied with bills 
on London growing out of stock transactions." — -Newspaper. 
Explain the meaning. 

7. In a footnote on page 130 it is said that $4,895 (as 
the rate of exchange on London) is called the gold-export 
point. Show that there is a gold-import point ; what it is ; 
and why. 

8. "When I came to Marblehead they had their houses 
built by country workmen, and their clothes made out of 
town, and supplied themselves with beef and pork from 
Boston, ivhich drained the tozvn of its inoiiey." — Barnard's 
Autobiography. Criticise the part in italics. 

9. "Bills drawn against these heavy shipments (of cot- 
ton) flooded the foreign exchange market this week (Nov. 
19, 1903), depressing it to the lowest level since November, 
1900." Explain fully what this means. 

10. Argument for a subsidy to the American merchant 
marine : 

"We pay no million dollars per annum for the carrying 
of products between this and foreign countries. Think of 



M()\'I',.MF.XTS AND DTSTRTP.T'T l( ).\- 147 

it. One hundred and ton million dollars in j^old coin has 
gone out of the commerce of this countr\- into the commerce 
of other countries. Can New York stand this?" — James 
G. Blaine, 1881. 

(a) Did our i)ayino- 1 10 million dollars per annum for 
freights mean that $110,000,000 in gold coin was directh- 
used for this purpose ? 

(b) Did it mean that in the end we lost that nuich 
gold ? 

11. A New York wheat ])roker sells 50,000 bu. of 
wheat to a Liverpool miller, and sells against it a sight bill 
of exchange for the proceeds, £8735 i6s. The wheat cost 
him 84c per bu. With exchange on London at $4,875, what 
would his profits be? What would they be with exchange 
at $4.85? 

How would a change from the former to the latter figure 
tend to affect exports from America? Explain. 

12. "In spite of the fact that the rate of exchange is 
at $4.85 several large gold shipments to France were made 
last week." What kind of a movement must this have been? 

13. "Nevertheless about a million sterling this vear 
will go out of the country for cars (automobiles) of for- 
eign manufacture. All of this ought to have been retained 
at home." — From an English magazine, 1902. Criticise. 

14. From Cuming's Tour (1807). Lamenting the dis- 
continuance of lead mining at Millerstown. Ky., Cuming 
says it "might have been the source of a very extensive 
traffic to the state independent of the keeping in it a con- 
siderable sum of the circulating medium which is now paid 
for that useful metal (lead)." Show that there is no rea- 
son to suppose that Millerstown had any less circulating- 
medium than it would have had. if it had produced lead 
rather than bought it. 

15. "So long as we were employing large amounts of 
capital borrowed from Europe, it was inevitable that our 
interest obligations on that capital would lead to a large net 



148 CHAPTERS ON MOxXEY 

export of gold almost every year. But now that our indus- 
tries have become self-sustaining, the case is wholly chang- 
ed. Doubtless in the future as in the past, we shall see tem- 
porary outward movements of gold quickly to be offset 
by reverse movements. But net exports, exports which for 
a period of years steadily exceed imports, these, we may be 
sure, have ceased permanently." 

Assuming it to be true that our industries have become 
self-sustaining, criticise the first and fourth sentences. 

16. Show that the export of gold from a country pro- 
ducing it like the United States, does not naturally take the 
same form as that taken by other exports such as cotton 
and wheat. 

17. "If it were possible for any one county to provide 
by law or otherwise that no dollar which came into it could 
be sent out, within two years the county would be so much 
richer than its neighbors that they would begin to wonder, 
etc." (a) Supposing the county in question to have the 
amount of money needed to carry on its trade, would it 
be of any advantage to its inhabitants to have additional 
amounts brought in and kept in ? { b ) Would it mean di- 
minished prosperity? 

18. "You admit that it would increase the productive 
])Owcr of a particular county to have a man worth a hun- 
dred thousand dollars move in, bringing his wealth with 
him. How then can you deny that the county would grow 
richer if it could and should for two or three years stop all 
nionc)' going out." 

I 'ndcr normal conditions, would a man's bringing $100.- 
000 in money into the county under a strictly enforced con- 
dition that not one cent more should go out of the county 
in purchase of goods from other i^laces than would have 
gone if the $100,000 had not come in. tend to increase the 
productive power of the county? 

i<). For some weeks during the first half of 1895. the 
rate of exchange on London was all the time about $4.00; 



.m(i\i;m i:.\"rs and iMSTRiiir'noM 149 

yet i^old was not exported. Try to get the explanation. 
Xoyes' Thirty Years of Ameriean Finance will help. 

20. Give a special reason why the L'nited States in 
borrowing- from Rnrope wonld not naturally take the pro- 
ceeds in the form of money (g"old). 

21. Look up the so-called discount policy used by the 
Hank of England to protect its gold reserve; and explain 
its working". 

22. "New York. Dec. 1 1, i<;o3. The banks gained 
from the interior this week $2.042,806."— -Newspaper. Was 
that normal ? 

2}^. In 1850 our mint coined both gold and silver at a 
ratio of 15.98 to i, while the market ratio was 15.7 to i. 
Which metal did we overrate? Which metal did France, 
with a mint ratio of 15.5 to i, overrate at that time? 

24. In 1855 France was coining both gold and silver 
at a ratio of 15.5 to i, while the market ratio was 15.38 to i. 
Which metal, if any, must have been exported? 

2^. Suj^pose France and England had bimetallic sys- 
tems and the latter wished to draw gold from the French 
circulation into her own. How could she accomplish this 
result ? 

26. "T see that Mexico is proposing to adopt a goUl 
dollar about half as valuable as ours, that is. to make 25.8 
grains of gold worth 2 dollars, thus rating it a hundred 
per cent higher than we do. This should not be allowed, 
for. making gold worth twice as much in Mexico as here 
(the United States), it will surely lead to the export of our 
gold into Mexico, thus cutting out the very foundation of 
our system." Explain this fallacy. 

27. How do you explain the fact that new communi- 
ties are apt to experiment with cheap substitutes for what 
is commonl)' called "'sound money." 

28. Between 1891 and 1896 our gold exports were most 
of the time abnormally in excess of our imports. Give var- 
ious causes which probably contributed to this result. You 



150 CHAPTERS ON AIONEY 

can get help from N^oyes' Thirty Years of American Fi- 
nance. 

29. Why is there a HabiHty that our stock of silver 
dollars and certificates will bring about a gold drain from 
the country, even though this kind of money continues to 
be on a par with gold? Why would it naturally drive out 
gold, if it did not remain on a par with gold? 

30. What was the direction of the net movement of 
gold between us and foreign countries between 1864 and 
1876? What do you suppose is the explanation? (Get facts 
from Statistical Abstract for 1900.) 

31. What was the direction of the net gold movement 
in 1877 and 1878? Explain why. 

32. "In the first six months of 1890 nine-tenths 

of the customs revenue at New York was received in gold ; 
in the corresponding period of 1892, three-fourths of it 
came in legal tender notes." Noyes' Thirty Years of Am- 
Finance, p. 169. Explain the fact. 

7,;^. "London, Nov. 20, 1903. One hundred and fifty 
thousand pounds sterling gold will be shi])ped tomorrow 
to America." Is this normal ? 

34. From 1894 to 1897 inclusive, almost no gold, coin 
or certificates, was received by the United States for cus- 
toms, — treasury notes and certificates making nearly 100 
per cent of the receipts. In 1898 the tide turned, and from 
that time on gold constituted from 70 to 90 per cent. Ex- 
plain the facts. 

35. Nov. 21, 1903 "the movement of currency to the 
interior continues, but on a smaller scale than for some 
weeks." Is this a normal state of things? 

36. Show that the abundance of exchange on Europe 
created in New York by our borrowing from Europe (page 
122), would automatically stimulate imports. 



CHAPTER V. 

THE MONEY STANDARD. 

In Chapter II we learned what is meant by the monetary 
standard and how it is one of the most vital elements in a 
monetary system. Since it is of such significance, its 
proper regulation and management is very important. If, 
for example, we set out to have gold for our standard and 
yet find it best to use silver for a subordinate money, there 
is the possibility that the silver will drive out the gold and 
make itself the standard ; and. to avoid this result, matters 
must be regulated and managed in just the right way. But, 
in order to manage properly matters pertaining to the stand- 
ard, we must of course know the natural laws governing 
these matters. Accordingly, this chapter is devoted to the 
principles concerned with the monetary standard. These 
principles we shall find it convenient to divide into three 
groups: (i) those defining the immediate standard, or 
standard money, (2) those detenniiiing the standard money, 
and (3) those defining and determining the nltimate stand- 
ard. 

I. DEFINING STANDARD MONEY. 

Principle i. The standard money of any system must 
be a money whicli is at par. 

This proposition is hardly more than a corollary from 
the definition of standard money. Standard money is that 
mone^■ which is the immediate standard of the system, i. e. 
the monc} which immediately determines what the money^ 
unit is worth. To it, the money unit is anchored. Its value 
is the value given to the unit. But plainly we can not say 
of a given money that it fixes the value of the money unit, 
vmless a unit of that money has the same value as the 



152 CIIAl'TF.RS OX MOXKV 

nioncv unit it is said to fix. Thus \vc surely can not say 
that i^old coin is the standard money of the United States, 
if we find that gold ten-dollar pieces are worth eleven dol- 
lars each. Some other money worth ten-elevenths as much 
as gold must really l:e fixing the value of one dollar. Not 
all par moncvs are standard money, but surely no nioney 
which is not at par can be standard money. 
"^^ To illustrate this principle from our history, take the 
condition of things about fifty years ago. At that time 
the circulation of the United States contained more or less 
gold coin worth 100 cents on the dollar, bank notes ranging 
from 80 to 99 cents, and some silver dollars worth $1.03. 
Vmon"- the three, the g:old onlv could have been standard 
monev ; for neither the silver nor the notes was fixing the 
value of one dollar. — the silver was not. because it was worth 
uwrc than one dollar ; the notes were not. because they were 
worth less than one dollar. 

Principle 2. The standard money ninst be that one 
among the moneys'ichieh are constantly at par, which alone'^ 
has its vahte fixed independently of its relations to any 
dther monev forming a part of the eircnlatlon. 

Principle i told us that the standard money must be 
one which is at par. But it is not unusual to find two or 
more moneys fulfilling this condition. Which of such par 
moneys is the standard money? The principle before us 
enables us to answer this question for the majority of cases. 
Usually one, and only one, of the moneys has its value de- 
termined Independently of the rest of the moneys. Thus 
at the present time, though all of the moneys of the United 
States are at par, only one has its value independently de- 
termined, i. e. gold coin, the value of which is fixed by a 
lump of gold weighing 25.8 grains. In such a case, the 



* For the case of the really concurrent circulafion of tzi'o metal- 
lic moneys, both of which have the status of standard nioney, — a 
very rare case indeed, — see Principle 3. 



r>Ki\cir'i.i;s c.ovi-.kxing thk standard 153 

monev which alone has its value indc pondcn tly dctcnniiied 
must be standard m oney. 

' The argument for the principle is as follows. First, the 
independently-determined money and the other moneys in 
question coincide in value; since by hypothesis they all are 
constantly at par. Secondly, the coincidence in value be- 
tween the independently-determined money and the other 
par moneys can not be explained by supposing- that the val- 
ue of the former is fixed by that of the latter ; since this 
would contradict the hypothesis that the value of the for- 
mer is independently determined. Thirdly, it is not reason- 
able to explain the coincidence as due to chance: since (a) 
the theorv that chance could constantly maintain such a co- 
incidence is manifestly too improbable to be accepted save 
as a last resort, and (b) this extreme theory is presumably 
needless, since the other moneys by hypothesis are not de- 
termined by anything outside, hence are presumably free 
to move, and therefore maintain their coincidence with the 
independently-determined money by adjusting themselves to ^ 
^it. Finally, since the value of these other moneys is ad- 
I justed to, and determined by, that of the independently- 
i determined mone}', it, not they, must immediatel}' fix the 
I value of the mone}' unit ; and so nuist be standard money .^ 
^ Corollary i. As betiveen a money zvhich is habitually 
presented for redemption and redeemed in another money 
Liird'tJjc money in ii.'hich such redemption takes place, the 
decision must go to the latter. 

Thus, between treasury notes redeemable in gold coin 
and gold coin itself we must recognize gold coin as the 
standard money. This is too obvious to need proof. 

Corollary 2. As between a metallic money which is at 
par and freely coined and a metallic money which, though 
at par, is not fr eely coine d, the decisfon m ust go to the_ 
former. 

It is the principle contained in this corollary which makes 
gold coin rather than silver dollars the standard money of 



)54 CHAPTERS ON MONEY 

the United States at the present time. Tlie argument is 
as follows : ( i ) The value of the freely coined money is 
independently* determined. (2) The value of the not-free- 
ly-coined money is not independently determined. (3) 
Hence the former is standard money. The first proposition 
follows from a principle more naturally laid down in a 
later chapter, that a money which is freely coined must have 
the same value as the bullion in it. If it were worth more 
than the bullion, people would hasten to have the stock of 
metal turned into coin. If it were worth less than the bul- 
lion, people would promptly melt it into bullion. Hence the 
value of a freely coined money is bound to be determined 
only by the value of the metal in it, and therefore is bound 
to be determined quite independently of other moneys. The 
second proposition is equally certain. The value of a par 
money which is not freely coined is not independently deter- 
mined. First, its value manifestly has no fixed relation to 
the value of the bullion iil it. Because its coinage is limited, 
its value will be somewhat greater than that of the bullion, 
but not greater by a constant amount. It is sometimes 
worth fortv per cent more than the bullion, sometimes ten 
])er cent, sometimes one hundred per cent, and so on. That 
is, as respects its value as a coin such money is altogether 
cut loose from the bullion it contains, ranging as respects 
that bullion in untrammeled freedom. Secondly, it is im- 
possible to believe that the value of such a money is deter- 
mined by the quantity put out. In technical language it is 
not a case of scarcity value. If it were, its value would 
fall as the stock increased, rise as it diminished ; whereas, 
overrated coins like our silver dollar stay all the time at 
par with freely-coined gold, whether 50 millions are out or 
100 millions or 400 millions. Thus the freely coined money 
is independently determined as respects its value, while the 



* That is. independently of the otiier moneys. 



l'KI.\CII'l.i;S CON'lvKXINC. TTIIv STANDARD T55 

not-freelv-coined money is not so determined. The former 
then is standard money. 

Corollary 3. --Is- hcturcit a ciriiilatiiig note on zuliich 
payment has been t emporarily suspended and an overrated, 
Te'^at tender, irredeemable, coin, Jhe _former must usually 
lie looked on as the standard money. 

To illustrate this corollary, let us suppose that, without 
anv material change in our monetary system, the Treasury 
should cease to redeem its notes in gold, though redeeming 
them in silver if desired. Let us suppose further that gold 
went to a premium of 15 cents, a gold dollar commanding 
on the market $1.15, while treasury notes and silver dol- 
lars remained at par. What in that case should be consid- 
ered standard money, treasury notes or silver dollars? I 
answer, treasury notes. For, in the case supposed, it seems 
certain that treasury notes would have their value deter- 
mined independently of their relation to the silver dollars 
or anv other money in circulation, while silver dollars 
would have a value dependent on that of the treasury notes. 
In the first place, there is no reason to suppose that notes 
have their value kept equal to silver because redeemable in 
it. By hypothesis silver dollars are as coin worth much 
more than the bullion in them ; so that no one would wish 
to exchange the notes for silver dollars to be melted for the 
silver in them. Again, since the notes are just as good for 
monetary purposes as the silver, no one would wish to ex- 
change them for silver to be used as money. Thus it is 
not reasonable to suppose that the notes would have their 
value fixed by silver because redeemable in it. 

r>ut. not only is the value of notes not dependent on sil- 
ver redemption, there is further reason to think that such 
value is dependent on the relation of the notes to something- 
else, that is. gold. For by hypothesis we are dealing with 
a case of only snspended gold redemption. Since law as 
well as the general understanding call for payment in gold, 
the failure to make such payment would certainly be looked 



156 CIIAPTKRS OX MONIXY 

on as temporary. I'eople would say, '"Sooner or later re- 
sumption will take place, when these notes will be good as 
gold." Accordingly, the notes will be held somewhere near 
gold, moving nearer or further away, according as faith 
in exchange for greenbacks is small or large. In short, 
the value of treasury notes will tend to be fixed by their 
relation not to silver or any other actual money, but rather 
to something no longer a money, i. e. gold coin. Silver 
dollars, on the other hand, would have no such independent 
fixation. Their value would not be fixed by the bullion in 
them, that bullion being worth much less than they would 
be. They would not be fixed b}- their relation to gold, 
since they are not redeemable in gold now and would not 
have an\- prospect of being so redeemed. Thus, under 
the hypothesis before us, silver and notes would remain 
constantly equal in value, while only one of them, the notes, 
has an outside determination of its value, the notes there- 
fore according to the principle last stated would be stand- 
ard money. 

Principle 3. //", as happens in rare cases, there are tzi'O 
par moneys eacli of which has its vahie independently detcr- 
iniiicdj^_cither may be looked on as the standard money. 

Between 1834 and 1849 the laws of the L'nited States 
gave to both gold and silver the prerogatives of full legal 
tender and free coinage, at a ratio so near that of the mar- 
ket that both metals were coined and circulated." Since 
each was independent of the other in respect to its value, 
being worth the same as the bullion it contained, neither 
could claim the place of standard money to the exclusion 
of the other. When in 1849 Rold decidedly fell in value as 
compared with silver, the latter metal went to a premium 
and so ceased to be standard money. Principle i. 



* This statement is- contrary to tlie nsual acconnt of the matter 
l)Ut is. I tliink, correct. 



I'KI .\Cll'l.i;S (.ONKUN I XC. TITI-; STAXPARD I57 

II. i)irn:R.\i I X I xc, thi': staxdakd M()XI'\'. 

Tlic ])roce(ling' discussion has fnrnislied i)rinciplcs which 
enable us to answer the (|uestion. How is standard money 
ascertained ? We have now to go into the deeper question. 
How is standard money determined? What under given 
conditions must be stanchird money ? 

In our account of a nK)netary system in Chapter H. it 
was brought out that the standard money of any system 
performs that role in more than one relation, making it 
possible to conceive and even to have several standard 
moneys. Thus we ma\- have the standard money of prices, 
the standard money of taxes, the standard money of rail- 
way debts, the standard money of commercial debts, and so 
on. Xow, of these several possible standard moneys, two are 
for practical purposes most significant, the standard money 
of prices and the standard money of ordinary debts. ( )ur 
first task is to ascertain the relation of these two. ( i ) Are 
thev the same or different? (2) If the same, which is the 
])rincipal one? Which is the mountain and which is Ma- 
homet? Now all experience shows us that these are nearly 
always the same. I doubt if there ever was an exception. 
And this identity of the two we can easily see is bound to 
come. Just fancy hov\- it would work to have in business 
one nu^aning for the dollar in debts and another for the 
dollar in ])rices! Think of the grocer fixing his prices in 
one kind of dollar, while his note to the jobber or the charge 
on his books against a credit customer was in another sort 
of dollar! Surely no man of sense would carry on business 
in this way unless he was obliged to. And of course he 
would not be obliged to; for he is at liberty to rate his 
prices in any sort of dollar he pleases. It is quite certain, 
then, that the standard money of prices and that of debts 
will be the same. 

r.ut now comes the second (|uestion. Which will be 
the determiniuG: one of the two? Which will first be fixed 



158 CIIAI'TlvRS ON MONEY 

and then tix the other? Will some money become the stand- 
ard money of prices and then make itself the stand- 
ard money of debts, or licc irrsaf The answer 
is easy. Some one money will become the stand- 
ard money of debts and then take for itself also 
the place of standard money in prices. This follows ; be- 
cause the standardjnoney of prices is free to move, while 
that of"debtT~is~not. Goveriiment commonly fixes what 
m(ine\s shaJTbe legal tenders; whereupon natural law steps 
in and decides which one of several legal tenders shall be 
the standard money of debts. This result men can not 
change, save under very exceptional circumstances. But, 
while the standard money of debts is fixed by human and 
natural laws, that of prices is wholly a matter of the choice 
of the individual dealer. He is free to rate his goods in 
gold dollars, or silver dollars, or greenback dollars, or even 
pounds or marks, if he desires. If then the two dollars are 
to be the same, it will be because the dollar of prices is 
made the same as that of debts. But tliey are bound to 
be the same, as we just saw, therefore the standard money 
of debts fixes that of prices. Putting this into formal shape 
we have 

Principle 4. Jf there are in any system two or inore__ 
inonexs, that one wJiieli is the standard money of eonimer- 
cial debts 7<'i!l eommonly establish itself as the standard 
mone\ of prices also, that is, as standard money in general. 

Note. — ^It is not necessary that all the standard moneys 
of a system should be identical. The standard money of 
longf time debts could easilv be dififerent from that of ordi- 
nary debts, in fact, for certain classes of long time debts, 
this has more than once been the case. In like manner, the 
standard money of certain payments to government may be 
dififerent from what I call standard money in general. This 
was the case between 1862 and 1879, when customs duties to 
the United States had to be paid in coin or certain Treasury 



T'RIXCIPr.KS C.OVICI^XIXC, THI', STAXnARU I59 

notes c(|uiv;i!ent to coin/'' and so the dollar in the tariff 
meant a (|nite ditterent thing from the dollar of ordinary life. 

We have jnst seen that the standard money in general 
is hound to he the same as that of dehts. Let us go on to 
fix it still more definitely. In any typical monetary sys- 
tem, there will be one or more moneys which by law or 
general consent are a valid tender in payment of debts. 
Now. it is almost self-evident that the standard money of 
debts will be one of these valid tenders. Thus, if we have 
circulating side by side, gold coin, silver coin, treasury 
notes, and bank notes, of which the first three arc a valid 
tender and the fourth is not, the standard money of debts 
is certain to be one of the first three ; it can not be the 
fourth. This needs no proof. It follows necessarily from 
the fact that creditors have no right to refuse any one of 
the first three, but have the right to refuse the fourth. The 
fourth, therefore, can not make headway against its rivals. 
It must be admitted, however, that on various occasions 
there have occurred what seem to be exceptions to this 
statement. Non-legal tender bank notes have at times been 
the standard money of debts. But this is no real exception ; 
for it has happened only when, by the consent of govern- 
ment or of the general public, banks have been allowed to 
suspend legal money jjayments ; that is. to treat their own 
notes as a valid tender in the payment of their obligations. 
It is certain, then, that the standard money of debts is bound 
to be one of the moneys which are by law or custom a valid 
tender for debts. But Principle 4 t-ells that the money 
which is the standard money for debts will commonly es- 
tablish itself as the standard money of prices. This gives us 

Principle 5. TJic sfatidard money of any system 7cv7/ 
commonly bconc_ of the moneys whieh by law or general 
consent are z'ali'd tenders in payment of commercial debts. 



Demand notes of 1861. 






1 60 CHArTERS ON MONEY 

Corollary i. Any money wliicli by huu or general eon- 
sent is made the sole :'alid tender in paymelUTof debts icill 
!)€ standard ijipney. 

Corollary 2. // any money not legal tender in payment 
of commercial debts becomes less valuable in exchange than 
the legal tender >noneys, this fact will usually shoic itself 
in a discount on the less z'aluable Jiiouey. 

Thus, in the United States before 1863. whenever bank 
notes depreciated in value, this almost always showed in a 
discount on the notes. These notes were not leg'al tender 
and could not usually gain the position of standard money. 
Tf, therefore, they became depreciated, this fact showed in 
their being worth less than their face value, that is, in their 
passing at a discount. It is possible, however, for circum- 
stances to arise under which such non-legal tender bank 
notes become a valid tender by public acquiescence ; in 
which case they may become standard money. See Cor. 5 
under tlie next principle. 

We have just seen that the standard money is bound to 
be one of the moneys which are a valid tender in payment 
of debts. But, supposing these valid tenders to be unequal 
in value, which one of them will be the standard money? 
First, which will be the standard money of debts? If you 
had the right to pay your debts with either of two moneys 
one of which was worth three cen*s more than the other, 
which would you naturally choose? The cheaper of course. 
And what you would naturally do, experience proves that 
debtors generally do. It follows, then, that the cheapest of 
two or more valid tenders will be the standard money of 
debts. I)Ut. being the standard money of debts, it will es- 
tablish itself as the standard money of prices. Principle 4. 
Hence : 

Principle 6. //, among the valid tenders of any systeni, 
differences of exchange value arise, the cheapest of such 
I'alid tenders establishes itself as the standard money. 



PRINCIPLES GOVERNING THE STANDARD l6l 

XoTR I. — A (lifiference in bullion or material (intrinsic) 
value is not sutificient to bring this principle into operation. 
Note 2. — It is possible that a general consensus of action 
on the part of the public should take away the prerogative 
of valid tender from a monev to which this status is iriven 
by law. In that case such a money does not become stand- 
ard money, even though it is the cheapest. A notable in- 
stance of this is found in the history of California between 
1862 and 1879. Although treasury notes were then a valid 
tender by Federal law and were much cheaper than gold, 
the latter continued to be the standard money of California. 
This result was effected by concerted action on the part of 
the public, depriving the treasury note of its status of valid 
tender. 

Note 3. — This principle is often called Gresham's law. 
It should be carefully distinguished from the principle of 
circulation known by that name. To oust a money from the 
position of standard money is one thing; to oust it from 
circulation is another. In the United States at present, gold 
coin is largely expelled from the circulation by paper and 
silver, but it is still the standard money. 

Corollary i, A_differcnce_jn_ex£l%aiigj^JL'.aliic among the 
2^£li^£li.dj£L Moneys slw-a's itself In a premium 011 the more 
valuable. 

Since the cheapest becomes standard money, then it 
must be at par (Principle i). Any money more valuable 
must therefore be at a premium. 

Corollary 2. // two legal fender metallic moneys arc^ 
freely coine d at cTToinagc ratio different from the market 
ratio, the^ money coined from the oxrrrated metal will es- 
tablish itsyif^as the standard money. 

Thus, when both silver and gold were coined in the 
United States at a ratio of 16 to i though the market ratio 
was 15.3 to I, the money made from the overrated metal, 
gold, established itself as standard money. The reason is 
plain. Gold being overrated, that is, being too highly esti- 



l62 CHAPTERS ON MONEY 

mated, not enough of it was put into the coins. In conse- 
quence gold coin was worth less per imit than silver coin. 
But, being the less valuable of two full legal tender coins, 
it established itself as the standard money. 

, Corollary 3. //, /// flic case of a valid tender circulating 
note whicli has been hitherto kept redeemable in zvhat has 

'.bee2i_J]illiejJ.o ..stwidard money, a suspension of payments 
takes place, such legal tender note zvill almost eertaiidy es- 
tablish itself as the standard money." 

' TrTthe first place, the suspension of specie payments al- 
most certainly makes the paper less valuable than metallic 
money itself. For the refusal of the issuer to redeem his 
notes in metallic money almost certainly shows that such 
money is relatively scarce and difficult to get. In that case 
outside holders naturally will not furnish it in exchange for 
the notes of some one else or will do so only for a con- 
sideration. That is, the paper will be worth less per unit 
than the metal. But, if the paper is worth less than metal, 
being full legal tender it will displace the metal as standard 
money. 

Corollary 4. //. /;; a system having, as its recognized 
standard money, a full zvcight coin and, as subordinate mon- 
eys, legal tender, redeemable notes and a legal tender but 
h overrated and irredeemable coin, it becomes impossible in 
practice to convert the last-immed money into full zueight 
standard money zvithout expense, then the oz-errated com 
zvill establish itself as the standard money. 

Thus, if under the system at present prevailing in the 
United States it should become impossible to exchange sil- 
ver dollars or certificates for treasury notes or gold though 
the treasury notes continued to be redeemable in gold, then 
silver dollars would become the standard money and gold 
and treasury notes would go to a premium. The argument 
is simple. Since persons holding silver dollars would have 
more or less occasion to convert these into gold and could 
not do so without expense, a regular premium on gold and 



I'KIXCl I'l.IvS r.()\i:KXlNG TIIK STAXDARD 163 

notes in terms of silver would arise- — silver would become 
less valuable than gold or notes. But being- full legal ten- 
der as well as less valuable, it would displace gold and es- 
tablish itself as standard money. 

Corollary 5. //". /// </ sysfciii iisiir^ fur its paper circtila- 
11(111 (>///y ii()!i-lc;^al tender Iniiik notes, tliere fakes plaee a 
^eneial siispeiistoii of standard money payment on sucli 
notes, these notes -leill temporarily establish fhejnsel-zrs as 
tjie standard man e y. 

In the first place, a^suspension of payments on notes 
inevitably leads t o a fall of their value below metallic mon- 
ey. If the issuer refuses to give gold for them, outsiders 
surelv will do the same. So that anv one wishino- to ex- 
change notes for gold finds himself obliged to pav some- 
thing extra. But, again, under the circumstances before 
us, this something extra paid for gold takes the form of a 
premium on gold rather than that of a discount on notes. 
This would not ordinarily be true, as we learned from 
Principle 5, Cor. 2. The note, not being legal tender, is 
not commonly a valid tender at all. But the conditions 
are not ordinary. By hypothesis a general suspension of 
specie payments has taken place ; that is, practically all 
banks in a given citv or district are refusing to redeem 
their notes in standard money. Under these conditions 
there is really nothing for the public to do but to accept the 
notes of the bank as a valid tender. If they refuse to do 
so, there is no medium of exchange left to carry on busi- 
ness with. Accordingly, the business world acquiesces in 
the temporary suspension of payments, and exchange is 
carried on with notes, these being accepted both in ex- 
change for goods and in discharge of debts. Thus, the 
notes are less valuable than metallic money, and bv the ac- 
quiescence of the public they become a valid tender for ordi- 
nary debts. They therefore become standard monev ac- 
cording to the principle before us. 

The principle embodied in the above corollary was illus- 



J 64 CHAPTERS ON MONEY 

trated in the United States in 1837, in 1857, and probably 
in every suspension of specie payments prior to the pass- 
age of the national bank act in 1863. 
I Corollary 6. If, In a coininiiiiity which extensively em- 
ploys bank eredit (deposit currency) as a substitute for mon- 
c\. there takes place a general suspension of payment on 
deposits though not on notes, then bank credit or deposit 
enrrrncx icill temporarily establish itself as the standard 
money or the standard medium of exchange, and all forms 
of money proper zcill go to a premium. 

This principle has been illustrated two or three times 
under our present bank system. Thus for several weeks in 
1893 i" several Eastern cities where there was a practical 
suspension of payment to depositors, all forms of ordinary 
mone\- commanded a premium of from two to four cents 
on the dollar, and bank credit was the standard medium 
of exchange. The reasoning is like that under Cor. 5. 
il'>ank credit being no longer convertible into money would 
' naturally be less valuable than money; and, since in the 
■* general suspension of money payments the public had no 
other medium of exchange, they would be driven to accept 
•'liank credit as a valid, though not legal, tender. Bank cred- 
it, therefore, being the cheapest valid tender, would estab- 
lish itself as the standard medium exchange. 

Tit. PKlNCirr.ES DEFINING AND DETERMTNINC. THE ULTI- 
MATE STANDARD. 

From the preceding discussion we have learned how to 
recognize standard money and what laws determine it. The 
remaining principles explain the defining and fixing of the 
ultimate standard. 

Principle 7. If by any process whatsoever the standard 
money is kept constantly equal in value to a definite quan- 
tity of some s\dutance or group of substances, such sub- 
stance or group of substances constitutes the ultimate stand- 
ard of the system. 



I'KIXCII'LKS C.OVKKXIXG Tllp; S'l'AXDAKU 1 65 

Thus, if oold coin is the standard monc}- and is 1)\- free 
a)ina<;-e kejn constantly tMjual in value to the l)uIhon it con- 
tain>. then that bulhon is the ultimate standard. ( )r, if an 
irredeemable paper is the standard of the svsteni and it is 
kept ecjual in value to 412.5 grains of silver, or 25.8 i^rains 
of gold, or a Inishel of wheat, then 412.5 grains of silver, 
or 25.8 grains of gold, or a bushel of wheat is the ultimate 
standard. This principle needs little argument, being not 
much more than a corollary from the detinition of the ulti- 
mate standard. Just as standard money is behind other 
moneys, fixing their value, so behind standard mone\- there 
may be something still more fundamental fixing the value 
of standard money, beyond which something there is no 
further determinant, no other substance or commoditv 
which fixes its value. This "something" we designate the 
ultimate standard. Xow it can hardly be doubted that the 
412.5 grains of silver or the 25.8 grains of gold or the 
bushel of wheat mentioned in the above illustration, an- 
swers to our definition of the ultimate standard. Fi^ililS"-- 
the value of standard money, it is a standard ; and not being 
(kpendent on something else, it is the ultimate standard. 

r>ut there is one doubt which may arise in the reader's 
mind, especially in the case of a freely coined standard 
mone}-. "When by free coinage our standard money is 
kept equal in value to 25.8 grains of gold, can we properlv 
say that the metal fixes the value of the monev anv more 
truly than the money fixes the value of the metal. Surely 
gold as a metal has its value influenced by the value of gold 
money." Undoubtedly the last sentence is correct. The 
value of the money modifies that of the metal just as trulv 
as the value of the metal modifies that of the money. But 
then it is sufficient answer to the general argument, that we 
must think of the whole as determining the part rather than 
of the part as determining the whole. Gold the substance' 
includes not only the metal used for outside purposes but 
also standard money itself. If the two are equal in value, 



l66 CHAPTF.RS OX MONEY 

it surelv must be the uwncy ivhicli subiiiifs to tlic metal 
rather than the metal which submits to the money. That 
is, the metal is the ultimate determinant, the ultimate stand- 
ard. 

Corollary i. // tlie sfaiKfard mojiey is by any means 
"iVhatsoet'er kept interconvertible Zi'ithj.i_ fixed qiiantity oJ_ 
some metal, said quantify of said metal is thereby made the^ 
ultimate standard. 

That under the condition named standard money will 
necessarily have the same value as the said quantity of the 
said metal, scarcely needs argument. If any one who has 
the monev in question can always exchange it for bullion, 
if this becomes desirable, it surely can not be worth less 
than the bullion. On the other hand, if any one who has 
bullion can always exchange it for standard money, if this 
becomes desirable, that money can not become worth more 
than the bullion. Inlcrcunvcrlibilit4:,._theii, inust_Jkeej2, the 
monc\- and the l)ullion just ctjual in value. But, if stand- 
ard monev is kept equal in value to a given quantity of a 
certain metal, that metal by the principle is made the ulti- 
mate standard. 

Subcorollary i. // the standard money is freely and 
irratnitouslx eoined and no effective obstacles to melting it 
are set np. the bullion it contains is thereby made the ulti- 
mate standard of the system. 
*" Under the conditions named standard money is kept in- 
terconvertible with the bullion it contains ; for under free 
and gratuitous coinage anv one who has bullion, can con- 
vert it into coin, while free melting insures that any one 
who has coin can convert it into bullion. But, if these 
conditions insure the interconvertibility of standard money 
and bullion, they make said bullion the ultimate standard 
according to the corollary. 

Subcorollary 2. // some institution maintains a condi- 
tion of unlimited e.vehange. purchase and sale, betzveen 
standard money and a fi.ved quantity of sonic metal, said 



PKIXCIIT.KS C.OVRRXINC, THE STANDARD 167 

cjiiaiitify of said metal is thereby made the ultimate stand- 
ard. 

One of tlie most eminent authorities on the subject of 
money. Ricardo. long' ago proposed as a very sensible meth- 
od of maintaining the gold standard, that the standard 
monev, to consist of legal tender ])aper, should be kept at 
par with gold by being bought or sold at a fixed rate in 
exchange for gold at the issuing bank. For example, if 
the notes of the Bank of England were to constitute stand- 
ard money, that bank should be ready at all times to sell 
these notes for 113 grains of pure gold per pound sterling 
and buy them in with gold at the same rate ; or, what is 
the same thing looked at the other way about, that the bank 
should be ready at all times to buy gold with notes and 
sell gold for notes at the rate of 113 grains of gold for a 
pound sterling. Plainly the notes under such a system 
would always be interconvertible with 113 grains of gold, 
would, therefore, be equal in value to that bullion, which 
bullion, consequently, would constitute the standard. 

Prc->bably no system precisely like this has ever been in 
operation ; Init the bank money of the Bank of Amsterdam 
was during the eighteenth century maintained at a substan- 
tially fixed relation to gold bullion by a scheme which pretty 
nearly realized the conditions proposed by Ricardo. That 
is. wdienever the premium on bank money in terms of the 
worn coins in circulation fell below a certain point, the bank 
paid out specie, gold or silver, for bank money ; and, on 
the other hand, whenever the premium on hank money went 
above a certain point, the Bank paid out bank money in 
exchange for specie. In this way. a quantity of bullion 
worth three or four per cent more than the coin commonly 
current seems to have been maintained as the ultimate 
standard of the system for larger transactions. 

Corollary 2. If, in a eountry ha^'ing for its standard 
money a Hat note or coin, such action is taken that the rate 
of exchange on some other country ivhieh has, as its uiti- 



1 68 CHAPTERS OX MONEY 

mate standard a definite quantity of a certain metal, is kept 
substantially constant, then some definite quantity of said 
metal is thereby made the ultimaie standard of the first 
country. 

In 1893 Tiiclia, which had previously maintained a silver 
standard, suspended the coinag'e of its standard money, sil- 
ver rupees, thus transforming that luoney into a fiat money 
having an exchange value soiuething in excess of its bul- 
lion value. The immediate effect was to make silver rupees, 
rather than silver bullion, the ultimate standard (See Prin- 
ciple 8). The government, however, had not intended to 
establish such a system, but rather to work toward a gold 
standard, perhaps establishing such a standard under the 
condition of still using silver rupees as standard money. 
Apparently they had .some hope of doing this without pro- 
viding for the gold redemption of rupees, merely controlling 
the quantity of this kind of money so as to maintain a 
fixed relation between it and exchange on London, which 
would be equivalent to a fixed relation to gold. As a mat- 
ter of fact they succeeded in doing this only for a short 
time just before they finally went over to a gold standard 
maintained in the regular way (See Corollary i above). 
lUit for that brief period we must think of India as having 
had a gold standard just as truly as it has now. For, by 
keeping exchange on London at 16 pence the rupee, they 
ke])t the rupee equal in value to 16/240 or 1/15 of a pound 
sterling, i. e. equal to 1/15 of 113 grains of pure gold, or 
7.54- grains ; and, thus keeping the rupee equal in value 
to 7-5+ grains of gold, they made 7.5+ grains of gold 
their ultimate standard. 

Subcorollary. //' a country having a Hat money as its 
standard money keeps such, money interconvertible at a fixed 
rate with exchange on a commercial center haz'ing some 
metal for its ultimate standard, said country thereby makes 
said metal its ultimate standard. 

Thus, in the Philippines at the present time the govern- 



PKIXCIIM.ICS COVKRXING THK STAND. \KI) I 69 

mcnt. by keeping" the standard money — overrated silver 
pesos — interconvertible with exchange on New York at 
about 2 pesos to the dollar, thereby insures that these silver 
pesos shall at all times have substantially the same value 
as one-half dollar, i. e. as 12.9 grains of standard g:old. 
This action therefore makes 12.9 grains of g'old the ulti- 
mate monetary standard of the Philippines. 

Corollary 3. If, in a country liarinij^ for its standard 
money a fiat note or coin, sncli action is intentionally taken 
tliat the price of a certain metal on the open market is kept 
constant, tJiat metal is thereby made the ultimate standard 
of the system. 

To illustrate, if between 1862 and 1876, when the United 
States had irredeemable notes as its standard money and 
gold was daily bought and sold like wheat, the government 
had intentionally so managed matters as to keep the price 
of gold at, say, $1.20 all the time, then gold would really 
have been the ultimate standard. This does not mean that 
the standard would have been the same as now, i. e. 25.8 
g-rains of gold. It would reallv have been a smaller quan- 
tity of gold, approximately 20.2 grains. 

Corollary 4. //, /'// a country luming as its standard 
money a tiat note or coin, such action is intentionally taken 
that the az'eragc price of a certain list of goods is kept con- 
stant, siicJi list of goods, or some fractional part thereof, 
is thereby made the ultimate standard of the system. 

Thus, let us suppose that a list of goods is drawn up. 
including a certain amount of coal, a certain amount of 
flour, a certain amount of beef, and so on ; that the sum of 
the prices of these goods is just $100 at a given time; and 
that we agree to make one one-hundredth part of this 
bill our standard, i. e. to cause the value of our unit, one 
dollar, to be determined by one one-hundredth part of the 
value of the bill of goods. Now, if, whenever the total 
value of the bill rises, say to $105, we so manipulate things 
as to bring it back immediately to $100 ; and, whenever the 



170 CllArTKRS ox MOXl^Y 

total value falls, say to $95, we so manipulate thinos as to 
bring it back immediately to $100, then we shall thereby 
keep one dollar constantly worth tlic same as one one-hun- 
dredth part of the total bill, and so shall make one one- 
hundredth part of the total bill our ultimate standard. 

Principle 8. // the standard money is not kept con- 
stantlx equal in value to a fixed quantity of some commodity 
or group of com modifies outside itself, but 7'aries in I'alue 
independently of the ixiriations of any other object, then 
sueli standard money is itself the ultimate standard of the 
system. 

Thus, between 1862 and 1879, tlie United States had as 
its standard money the treasury note. Gold and silver were 
commodities, bought and sold like wheat or cotton. Bank 
notes and checks were convertible into treasury notes and 
so had their value determined l\v these notes. In all ordi- 
narv transactions the meaning of the dollar was fixed by 
these notes. But, not only were treasury notes the stand- 
ard money, further, there was nothing outside themselves 
to fix their value. They were not convertible into gold or 
anything else ; they constantly fluctuated in value as com- 
pared with anything else. This kind of money, therefore, 
must have been, in respect to its value, self-determined. 
Thus, that thing which, under the circumstances, was 
standard money, was at the same time independent in value 
of everything else, was absolutely self-dependent. It must, 
therefore, have been both standard money and the ultimate 
standard of the monetary system. 



PROBLEMS. 

I. "In 1830 the ultimate monetary standard of the 
United States was silver." (i) What does that mean? 
(2) Just what amount of standard silver constituted the 
standard ? 



I'Kixciri.i'.s r,()\"F.Rxixr. tiik staxpard 171 

2. \\'hat do wc HKan by sa\ iny that standard money 
is tlie immediate monetary standard? 

3. SiK'er dollars are a universal and unlimited legal 
tender as much as gold coin, is it not then just as propef 
to call them standard money ? 

4. What is standard money in the Philippines? 

5. In the United States in 1870. gold coin was worth 
$1.21 per dollar; silver coin. $1.23: and legal tender treas- 
ury notes, $i.oo_. Which one, if any. must have been stand- 
ard money ? ~~ 

(). For several weeks during the panic of 1837 coined 
money of both silver and gold was at a premium of 2 to 
4 per cent ; while ba_nk notes were at jDar. ( i ) What must 
have been standard money? (2) Can you explain the facts? 

7._ Add to the 5th problem that national bank notes 
were also at par, and were redeemable in treasury notes. 
Is the answer the same as before? Explain. 

8. During the third quarter of the 19th century, Aus- 
C^ tria had a circulation consisting mostly of legal tender 
notes, her silver coins being at a premium on accoimt of 
the suspension of specie payments on the notes. By 1879, 
however, the value of silver bullion had fallen so far that 
the premium on silver coins disappeared. The government 
then suspended the further coinage of silver, intending 
l)robably to follow the example of those nations which had 
already adopted a gold standard. As a result silver coin 
ceased falling ; and for the next decade silver and notes 
were both at par, i. e. were worth 100 cents on the dollar. 
AMiich should we think of as being standard money? An- 
swer : legal tender notes. Explain. 

(). In the United States in 1830 both silver and gold 
were freely coined at a ratio of 15 to i. The market ratio 
being at the same time 15.8 to i, which metal did our mint 
imderrate? Explain carefully. <^^c^ vV^ 

10. In 1830 the French mint ratio was 15.5 to i. Which 
metal did it overrate? Explain. 



172 CIIAPTKRS ON MONEY 

11. In 1834 \vc changed our mint ratio to 15.98 to i. 
the market ratio being- 15.73 to i. Which metal did we un- 
derrate? ,v 

12. What is meant by saying that our mint ratio was 
15.98 to 1 ? 

13. What ratio do we use in making silver dollars? 
silver quarters? 

14. In 1855 the circulation of the United States con- 
sisted of gold coins worth $1.00 per dollar, silver dollars 
worth $1.03 per dollar, fractional coins worth $1.00 per 
dollar, and bank notes ranging from par downwards. What 
must have been standard money ? What was the ultimate 
standard ? 

15. In 1873 France had a bimetallic system; but, when 
the fall in silver threatened to expel the gold, she restricted 
the coinage of silver with the result that silver coins re- 
mained at par with gold. What thereupon became the 
standard? Explain. 

16. In 1853 France had a bimetallic system with a 
mint ratio of 15.5 to 1, while the market ratio was 15.33 to 
1. What must have been the standard? Explain. C^f>Ac>- 

17. From a student's answer to Problem 14. "Gold 
was the standard. This ratio overvalued silver and drove 
it out of circulation. At that time a silver dollar was worth 
about $1.02 in gold." Point out mistakes. 

18. Are Bank of England notes legal tender? Bank 
of France notes? Bank of Germany notes? National bank 
notes of the United States? 

19. Suppose that the Imperial Bank of Germany should 
suspend gold payments on its notes, thus bringing about a 
difference in value between them and gold, would this 
show in a discount on the notes or a pr eniium on . .^.oldi' 
Is there any reason for thinking that it might turn out the 
other way ? 

<r\ 20. In 1857 there appeared a difference in value be- 

■ tween gold coin and practically all bank notes, and this 



TKIXCI l'l.i;S CdXlvKN INC. 'rill". STAND. XRF) I73 

difference showed in a premium on ^old; though in those 
days such a (hfference usuall\- showed in a chscount on notes. 
How can you explain this exception? 

21. Supposint;- that in 1905 Mexico had simply sus- 
pended the free coinage of silver making no effort to regu- 
late further the value of silver coin, ( i ) what under those 
conditions would have heen her ultimate monetary stand- 
ard? (2) Suppose that going further she had so managed 
things as to keep exchange on New York all the time at 
2 pesos per dollar ; what then would have been the ultimate 
standard? (3) Would standard money l)e an\' different in 
the two cases ? 

22. What is the ratio between silver and gold used in 
coining Philippine pesos at the present time? Does it over- 
rate silver more or less than our silver dollar ratio? 

2^. How is there any point in talking about the Phil- 
ippine ratio, seeing that they have o)ily silver coin ? 

24. Let us suppose that in the United States in 1830 
ofold coin was worth five cents on the dollar more than 
silver coin, and silver coin two cents more than bank notes. 
What in such case must have been the nominal rating of 
each of the three different moneys? 

25. In the United States in 1825 the mint ratio between 
gold and silver was 15 to i, while the market ratio was 15.7 
to I. Which metal was overrated? Explain. ^ s^* ^ 

26. In 1873 the market price of standard gold in the 
Unitetl States was about $21.02. I'y 1896 its value had 
risen, sav, forty per cent, yet its price had fallen to $18.60. 
How could this be? . 

27. In the United States at the present time (August 
1903) we have silver dollars worth in exchange $1.00. but 
onlv 43 cents as bullion, treasury notes and bank notes each 
worth in exchange $1.00. and gold coin worth $1.00 both in 
exchange and as bullion. What is our standard money? 
What is our monetary standard? Explain. 

28. If the Philipi)ine government were to maintain ex- 



174 CHAPTERS OX MONEY 

change on Xew York at $.50 precisel}', what would there- 
by be made their monetary standard? 

29. Could we, without any change in our laws, go to 
a silver bullion standard? Explain. 

30. How could we go to a silver dollar standard with- 
out an}' change in our laws? 

31. "In the United States in 1827 the actual standard 
was silver, since gold money was out of circulation." Is 
the reason given a good one? 



CHAPTER VI. 

THE NATURAL LAWS REGULATING CHANGES 
IN THE VALUE OF MONEY. 

"Yesterda}' morning- in Chicago wheat sold at $1.50, 
just 50 cents higher than the price twelve months ago." 
Our first thought, on reading an item of this sort, is that, 
within a single year, the real value of wlieat, the estimate 
which men put upon it, has increased by 50 per cent. Prob- 
ably something has occurred to increase the demand for 
wdieat — perhaps its more extended use as food in some part 
of the world ; or something has occurred to cause a fall- 
ing off of the market supply — say, a failure of the Argen- 
tine crop. Anyhow the cause of the change is in zvheat. 
Its value has been raised by changed conditions. Such, I 
say, is our first thought ; and, in the great majority of cases, 
this way of interpreting the fact would be quite right. But 
it is always possible that we have been mistaken ; and a 
little further consideration will show us how this might be. 

L,et US' suppose that, turning our attention to goods 
®ther than wheat, such as apples, cotton cloth, shoes, and so 
on, we discover that wheat is not the only thing which has 
advanced in price, that almost everything has risen about 
the same amount. In that case, surely, the thought would 
come to us that probably it is not the wheat at all which 
has changed, but rather the money. Perhaps, since the 
date when wheat was $1.00, the country has changed to a 
new standard, say 550 grains of silver worth about two- 
thirds as much as the present standard. In that case, 
the prices of things would naturally have advanced about 
one-half, since the measuring unit would be a third smaller;- 
just as the contents of a cask holding 100 gallons would 
increase to 150 gallons, if, the gallon measure were made 
a third smaller than it now^ is. Or we might suppose that 



176 CHAPTERS ON MONEY 

instead of there having been made such a change from the 
old standard to a cheaper one, the vakie of the old standard 
had fallen off ; that, because of excessive production gold 
had come to be worth a third less than formerly. This 
change in conditions, like the one just considered, would 
show in a fifty per cent advance in prices generally. It is 
thus evident that there may be changes, not only in the 
value of goods, but also in the value of that money in 
which the values of goods are measured. Further, the 
student will doubtless be ready to believe that such changes 
in the value of money are likely to be of great practical im- 
portance. If money suddenly and greatly falls in value, i. e. 
if prices rise, all persons dependent on fixed money in- 
comes will lose heavily. On the other hand, if money sud- 
denly and greatly rises in value, i. e., if prices fall, persons 
having fixed money payments to make will find their bur- 
dens greatly increased.* Accordingly, a very important 
task for us as students of money must be the investigation 
of those natural laws which regulate changes in the value 
of money ; and this task we will now undertake. 

I. THK NATURE OF CHANGES IN THE VALUE OF MONEY, AND 
THE DIFFERENT KINDS. 

F'irst. we must set about getting a more definite notion as 
to the precise nature of these changes in the valuef of mon- 



* Provided they depend on the selling of goods to get their in- 
comes. 

t The student must be careful not to confuse changes in the 
7'aluc of money with changes in its t>ricc. Since t he money unit is 
the measure in which prices are stated, the price of the money unxL. 
can never change within the territory where it holds the place of 
measuring unit. As measured in itself, no object can change in 
value or length or weight or any other particular. Thus, the price 
of a dollar must always be a dollar, i. e.. itself. Under.stood rightly, 
this is of course self-evident. A dollar is worth a dollar. A foot 
is a foot long. A yard is a yard long. A pound weighs a pound. 
But though the price of money can not change, its 7'aluc can, as we 
have already seen. i. e., we may value money less highly as com- 
pared with other things than we did last year or ten years ago. 



rK[NCiri,RS GOVKKNING ITS VALUE I 77 

ey. Recalling for a moment the discussion contained in the 
preceding paragraph, we note that the reason there given 
for thinking that tlie rise in the price of wheat was not 
really a change in wheat Ijut rather a change in money, is 
that K'hcat z^^'as not alone In rising, — that the prices of most 
other goods had risen. This is sim])ly a special application 
of a rule of interpretation which we follow in every field. 
\\'henever a great many things show a sim i lar change in 
thei r relation to a single other thing, it is natural to assiniK- 
that soin c canst.- lias modified the one thing, rather than 
that similar cause s have simultaneously modified all the 
other thi ngs. For example, suppose we are sitting in a 
railway clir looking out of the window, and that we see a 
span of horses and a wagon which seem to be moving past 
us, while the telegraph poles, the fences, the trees, and every- 
thing else seem to be at rest. Naturally, we assume that 
all these other things, including our car, are at rest, that 
only the horses and wagon are in motion. But, change the 
hypothesis : suppose that the horses and wagon, the tele- 
graph poles, the fences, the trees, and everything else seem 
to be moving past us at the same rate of speed. Our in- 
terpretation of things is now very dififerent. At once we 
conclude that it is our car which is doing the moving, that 
all the other objects are at rest. It is thus perfectly natural, 
when we find the values of goods in general, measured in 
money, moving in the same direction, to infer that in realitv 
the value of mone}- is moving in the opposite direction ; to 
interpret ^a general rise in prices as a fall in money, and a 
general fa ll in prices as a rise in monew 

I)Ut, while it is perfectly natural, and also customarv, 
to interpret every change in general prices as an opposite 
change in the value of money, it is not entirely proper to 
do so without some further explanations. If we mean pri- 
marily by value what underlies the popular use of the word 
and has come to have general vogue among economists as 
one important meaning, viz.. the state or propertv of being 



178 CHAPTERS OX MONEY 

prized — being' recognized as significant for our welfare,* — - 
it is entirely possible to have a general change in prices 
which is not a change in the value of money, but only a 
change in the value of goods. Thus, it is entirely conceiv- 
able that 25.8 grains of gold have a certain recognized sig- 
nificance to the welfare of men which did not change in the 
least between 1870 and 1890, while the significance of cot- 
ton cloth, steel rails, plows, reapers, and goods generally, 
declined very greatly because of cheapened productive pro- 
cesses. Supposing such a statement to express the facts, 
it would be .quite proper to say that the value (subjective) 
of gold remained stationary during the period named, while 
the values (subjective) of goods in general fell. Neverthe- 
less, this change would have shown itself in a fall of gen- 
eral prices which we commonly interpret as a rise in money. 
That is, a downward movement of prices extending to prac- 
tically all goods might mean, just what it says on its face, 
that the values of goods — having in mind subjective values 
— have fallen, while that of money is unchanged. So, an 
upward movement of general prices might mean just what 
it says on its face, that the values of goods generally have 
risen, while that of money is unchanged. 

To make the point more definite, if we continue to 
mean by value, siibjccti-i'C value, a fall in prices would 
mean a rise in money only on condition that the cause of 
the change was something connected with money which 
had raised our estimate of its real significance, thus making 
our measuring unit larger and, so. reducing the nominal 
value of the other things measured in it. Thus, it might 
be that gold had grown very scarce, and. therefore, the 
significance of the least important portions of the' stock, 
which determine its value, had greatly increased. On the 
other hand, a rise in prices would really mean a fall in 
mone\-, only on condition that the cause of the change was 



* Called subjective value. 



pui.\cii'i,i;s ('.(A'lvuxixr. its WNLn: 179 

something connected with money which had lowered our 
estimate of its real significance, thus making" our measuring 
unit smaller and, so, enlarging the nominal value of the 
other things measured in it. Thus, in the first weeks of 
1865. as the Southern Confederacy came nearer and nearer 
the hour of total colla]\se, and. so, the |)a])er monev which 
it had issued approached nearer and nearer the da\- when 
all possihility of its redemption in real money would finally 
disa])pear, its real value, — the significance which attached 
to it in men's minds — rapidly fell otif, and, of course, the 
vahies of all thing's, measured in it, just as rapidly rose. 
We thus find it necessary, at least theoretically, to dis- 
ting'uish among' changes in the general price level, ( 1 ) 
those \vhich for the moment we sha ll designate as changes 



the valu ejnf goods, and ( 2 ) tliose which for the mo ment 
will be called changes in the value of mone y, or ( i ) appar- 
ent and (2) real changes in the value of m one\'. But this 
distinction of apparent and real changes in the value of 
money is not only of theoretic significance ; it has also great 
practical importance. For example, let us suppose that a 
sharp rise in general prices takes place, working much loss 
to persons having fixed money claims, salaries, interest, etc. 
If now, the change is due to the fact that the government 
has debased the currency — has made one dollar into two or 
resorted to the issue of irredeemable paper, — every one feels 
that a wrong has been done which only the most evident 
public necessity could excuse. But, on the other hand, if 
the rise in prices has grown out of the fact that natural re- 
sources are becoming exhausted, or the fact that from an\- 
cause the cost of production has increased, we say at once 
that no injustice has been done, — that humanity in general 
has simply experienced a great misfortune, which creditors, 
salaried persons and so on must bear along with the rest. 
In like manner, wdien prices fall and so work injury to 
those who are burdened with fixed money obligations, the 
attitude of society toward the matter depends entirely on 



iSo CHAPTERS ON MONEY 

tlie cause. If we have siuldenly changed from a silver stand- 
ard of 412.5 grains to a gold standard of 25.8 grains worth 
more than twice as much as the silver, and so have brought 
about a sudden drop in prices, the wrong is evident and 
great, onl}' to be excused by public necessity of the clearest 
sort. Uut. if the fall in prices is due to diminished cost of 
production, the case is very different. The debtor whose 
])roducts fall because the cost to those producers who deter- 
mine the price has fallen, will suffer some loss ; but it is 
a loss which society can not hope to eliminate. It is one of 
the inevitable accidents of industry, just such a one as the 
injury to certain classes of workmen from the introduction 
of machinery or to certain canals from the construction of 
particular railroads. 

From the preceding paragraphs, we have learned that it 
is both theoretically and practically necessary to distinguish, 
among changes in the general price level, those which are 
only apparent, from those which are real, changes in the 
value of money, — those which are changes in the 
value of goods from those which are changes in the value 
of money. But, though this distinction is real and impor- 
tant, there are reasons for expressing it in another way, 
which reasons we must now explain. In bringing out the 
distinction, we started from one i)artionl;ir nieaning of 
vmIuc, — the state or propertv of being prized, or being rec- 
t)gnized as sign ihcant to human welfare. But. while this 
seems to manv of us the ultimate, root, idea of value, we 
commonly attach to the word in economic discussion a 
somewhat different meaning. The fact that things are 
prized 'by us will lead us to behave toward them in ways 
different from our behavior toward other things. In par- 
ticular, it will lead us to offer other prized things 
in exchange for them. They consequently present them- 
selves to our mind as possessing the powej or property of 
coinuiaiidi]ig in e.vehange otlicr things. And it is this power 



pRi.\cii'i,i:s c;o\i:K.\i.\<; its nalue i8i 



• 



or ])n)|)crty wliicli we coniinoiily liavc in iiiiiul wlicii we 
cliaracterize them as possessing- value; thoutih if we are 
very anxious to avoid ambiguity we eall tliis kind of value 
exchange value. 

Xow, it is obvious that, when value is used in 
this sense, a ehange in the value of either one of 
two objects compared, means an op])osite chanoe in tlu- 
other. Thus, if the value of wheat as expressed in nionev 
has risen from $i to $1.50, the value of money expressed 
in wheat has fallen from one bushel to two-thirds of a bushel. 
The phenomenon can not be described as a rise in wheat 
but not a fall in money, nor as a fall in monev but not a 
rise in wheat : for it is both at once. A rise in wheat is a 
fall in money, looked at from the wheat end. A fall in 
mone}- is a rise in wheat, looked at from the monev end. To 
say that Johnny's end of the see-saw has gone up is to say 
that Charlie's end has gone down. To say that Charlie's 
has gone down is to say that Johnny's has gone up." Ac- 
cordingly, all advances in the jM'ices of goods in general 
are commonly treated as declines in the value of monev. 
All declines in the prices of goods in general are treated as 
advances in the value of monev. That is. all chances in 
the general level of prices are treated as opposite changes 
in the value of money. 

We have just learned from the last paragraph that it is 
usual in our day to deny the propriety of calling some 
changes in the general level of prices changes in the value 
of monev, while others are said to be merelv changes in the 
value of goods. All changes in the price level are treated 
as necessarily changes in both money and goods at the 
same time, ^^'e must not, however, suppose that this usage 

* This is just as true of the relations between money and a 
single commodity, Hke wheat, as of the relation between money and 
all commodities. But usage limits its application to the second re- 
lation. 



1 82 CHAPTERS ON MONEY 

invcjlvcs our ignoring the distinction brought out between 
the two kinds of changes in the general price level. The 
reality and importance of that distinction is quite generally 
admitted, though the propriety of the older method of ex- 
pressing it is denied. Changes in the ])rice level ina\- 1)e 
either ( i ) those which are due to causes in some way 
connected with goods or (2) those which are due to causes 
in some way connected with money. If we must call both 
of these, changes in the value of money, we ought at least 
to prefix to the phrase some qttalifying adjectives which 
will indicate the difiference between the two sorts. While 
not altogether satisfied with the choice. I shall, for want 
of better terms, designate changes in the price level due 
to causes connected with goods as rclafii'c changes in the 
value of money, and changes in the price level due to 
causes connected with money as absolute changes in the 
value of money. Relative changes in mcJney are of course 
absolute changes in goods, while absolute changes in 
money are relative changes in goods. In general, our 
study of the matter is concerned with absolute changes in 
money. These are what the public usually have in mind 
when speaking of changes in the value of money ; and 
these are the changes which are of most importance and 
which it is reasonable to try to avoid. It will, however, 
be desirable to set forth one or two principles bearing on 
relative changes, if for no other reason than to hinder the 
student from confusing them with absolute changes. 

We have seen that our clue to the course taken by 
the value of money is the level of general prices. An up- 
ward or downward movement of prices is recognized as 
a downward or upward movement in either the relative 
or absolute value of money. Accordingly, it is quite im- 
portant to keep track in some way of the general course 
of prices; and much study and time has been given to 



i'Ki.\cii'i.ES (;()\'ERxi.\r. rrs value; 183 

this matter. Tlic i^eneral plan is to compute what are 
known as index mnnbers. First, it must be decided what 
commodities are .e^oing;^ to be taken into account, some 
statisticians usini^^- a few only, while others try to follow 
the coiu'se of a large number, even several hundred. Sec- 
ondly, a ])articular year or group of years must be 
selected to furnish the starting point .for comjMitations ; 
i. e.. the i)rice of that year is treated as the unit, and all 
variatit)ns are reduced to percentages of that unit. For 
example, suppose i860 were chosen as the base year, and 
we were computing the index numbers of wool. At that 
date, the iJoston price of Ohio medium was 475^ cents. 
This would be treated as i or 100 per cent, and the price 
of 1861, 3834, would be divided by 47/^ which would give 
us 81 per cent. 

The third step is to compute index numbers for each of 
the commodities entering into the case. We have just 
seen how this would be done in the case of wool. Carry- 
ing the process a few years further, we should have a 
table like this : 

Prices. Index Xiiinbcrs. 
i85o 471/2 cents. i860 too 

1 86 1 38M cents. 1861 81-}- 

1862 5o'/4 cents. 1862 io6-|- 

1863 75V4 cents. 1863 159+ 

1864 87 >/^ cents. 1864 1844- 

The figures in the second column show how the price of 
wool for any year compares with the price of i860: but 
of course they do not show the actual price of any year. 
That is, the table is one of relative prices. 

The final step is to make an average of the index 
number series for all the commodities involved. Thus 
supposing that we have computed series, like this wool 
series, for wheat, cotton, nails, lumber, etc., etc., up to 243 
commodities. If. now, we were to make a simple average 



184 CH.VPTERS ON MONEY 

of all these different series, we should have something like 
the fpllowing- :* 



i860 


100. 


I86I 


100.6 


1862 


1 17.8 


1863 


148.6 


1864 


190.5 


1865 


216.8 



/ 



This table would show us the course of general prices 
during these vears, the average of any year as compared 
with that of i860. 

With respect to the degree of usefulness attaching to 
such index numbers, there is still a good deal of con- 
troversy. Much can be said on both sides. We are doubt- 
less a long way short of perfection. But there can be 
little question that these numbers are after all of consider- 
able value. They show the direction of change pretty cer- 
tainlv, and the degree with sufficient accuracy for some 
purposes anyhow. They do not. however, give us material 
aid in distinguishing between those changes in prices which 
are onlv relative changes in the value of money, and those 
which are absolute ones. When this is important, we are 
obliged to go into elaborate studies to determine whether 
the chief causes of the change are connected with goods 
or with money. 

II. PRINCII'IJiS (GOVERNING MERELY RELATIVE CH.\NGES IN 
THE V.\EUE OF MONEY. 

Having considered the nature of changes in the value 
of monev, the dift'erent kinds which occur, and the meth- 
ods bv which actual changes are ascertained, we will now 
undertake to set forth the natural laws regulating these 
changes. And first, we will dispose of the most important 
cases of merely relatizr changes in money, i. e., absolute 
chano-es in the values of i^oods. Of these, the first to 



* The changes are very great, as the period chosen took in the 
reign of paper money in the United States. 



I'RINCII'F.KS GOVERNING ITS V^ALUE 1 85 

command attention are certain rai)i(l upward and down- 
ward price-movements, which are often mistaken for real 
changes in monev, hut which actually owe their existence to 
sudden and great changes in the demand for, and the sup- 
plv of, goods in general, which changes in demand ov sup- 
ply are not caused by changes in money. 

Doubtless the student is already aware, even if he has 
given little attention to political economy, that the whole- 
sale price of an}- particular commodity like wheat, for ex- 
ample, is immediately influenced through changes in sup- 
ply and demand. If the demand increases, price tends to 
rise : if demand diminishes, price falls. If supply increases, 
price falls ; if supply diminishes, price rises. More com- 
pactly stated, price varies directly as demand, inversely as 
supply . But, if this putting of the matter is true for a 
single commodity like wheat or wool or cotton, is it not 
also true for commodities in general? Surely it is. Any 
change in the demand for goods in general tends to cause I 
a like, though not proportional, change in the level of I 
prices; any change in the supply of goods in general tends 
to cause an opposite, though not proportional, change in] 
the level of prices. 

Xow. changes in demand or supply, of the kind just 
supposed, i. e., changes in general demand or general sup- 
ply, are not naturally to be looked for in ordinary times. 
Commonly, if people take to buying a particular kind of 
goods more than they have been buying it in the past, they 
will usually buy other kinds of goods less than in the past. 
So, if more of a certain kind of goods are brought on the 
market than formerly, less of other kinds will be brought 
on. I)Ut this is not always true. There are times wdien 
demand rises and supply falls off, or supply rises and 
demand falls oft", all along the line. Th e rising of demand, 
and falling oft' of suppl\- marks the boom 0£ inflation period- 
of an industrial c ycle. _The rising of supply and the fall- 
ing offof_demandma^ In 



1 86 CHAPTERS ON MONEY 

the boom period, every one has confidence in business pros- 
pects, generally uiidiie confidence. Each thinks prices are 
going higher, and so all are disposed to buy, few disposed 
to sell. As a result, prices keep mounting as if they could 
not stop. When collapse comes, the conditions are reversed. 
All wish to sell, few are willing to buy. IVices go down, 
down, as if they could never find bottom. Price move- 
ments of the sort here considered are never universal ; still 
they are likely to afifect so man\' articles, and those articles 
so much, that the average of prices shows a correspond- 
ing change; i. e., the value of money shows an apparent 
change in the contrary direction. As confidence increases 
and business booms, money falls in value. As confidence 
declines and business stagnates, money rises in value. But 
manifestly such changes in the value of money must be 
thoueht of as rclafk'e rather than absolute. The causes 
are outside money. Prices go up during the boom, not 
because something has happened to money to make it 
cheaper, but because goods have grown more valuable in 
men's minds. So, when collapse comes and prices fall, 
this is not because something has happened to money to 
make it dearer, but because circumstances have made 
goods less valuable in men's minds. Putting the principle 
just brought out into a formal statement, we have the fol- 
lowing : 

Principle i. Considerable Hiietitations in the relative 
I'aliie of money take place in response to changes in business 
confidence, eacli of these fliictiiafions shoieing a direction 
opposite to that of the change in business confidence lehich 
produces it. 

We have just seen how relative changes in the value of 
monev grow out of changes in business confidence acting 
on the supply of, and the demand for, goods in general. 
A second cause tending to modify the absolute value of 
o^oods, i. e., the relative value of monev, is a change in 



rRi.\ciri.i:s coxi-kmnc. its nai.ue 187 

cost of produclion. It is a familiar fact of every day life 
that, witli respect to many ])roducts at least, a change in 
cost of prodnction greatly influences price. If cheapened 
means of transportation make it possible to put Argentine 
wheat on the markets of Europe at 10 cents less than 
formerly, a fall in the price of wheat is almost inevitable. 
Tf new inventions make it possible to produce steel for $20 
a ton rather than $100. the price is almost certain to show 
a corresponding fall, liroadly speaking, price follow s^ cost. 
Many economists insist that, away down deep, utility is 
the really decisive factor, that somewhere there is a pro- 
duct of steel, the utility of which determines the value of 
all steel ; but they admit that, for all other products of 
steel, cost is the determinant of price ; that is, for practical 
purposes, we can safely act as if cost were the only thing 
to be taken into account. Uut. if the price of wheat or the 
price of steel, taken by itself, can be changed by changes in 
cost, it is surely possible to have a change in average prices 
due to the same cause. Not a few great inventions affect 
the cost of many different products. Steam power in fac- 
tories, steam transportation, cheap processes for making 
steel, and so on. all these influence many industries. It is 
therefore quite natural to expect, from such inventions, 
changes of value so great, and in so many articles, that the 
average of prices will be lowered. Such a fall in the 
average of prices will of course be an apparent rise in 
money. But. as in the preceding case, this apparent rise 
in money will be only a relative, not an absolute, change. 
The cause of the change is not in money but in goods. 
We value money no more, but goods less. From these 
considerations we obtain : 

Principle 2. Considerable fluctuations in the relatiiv 
7'alue of money fake place in response to chairj^^es in the 
cost of producing commodities, each of these fluctuations 
shoiciui^ a direction opposite to that of the change in cost 
by ichich it is caused. 



ly 



l88 CHAPTERS OX MONEY 

III. I'KIXCU'I.ES GOVERNING Al'.SOEUTK CHANGES IN THE 

VALUE OF AU)NEY. 

The t\\ o theorems already laid down dispose of the 
most important cases of merely relative changes in the 
value of money. We now come to the real task of this 
chapter, the presentation of those principles which govern 
obsolii/c changes in the value of money, that is, changes 
due to causes in some way connected with money. 

In the chapter devoted to an account of the typical 
monetary system of our day, it was pointed out that, in 
fixing the value of the money unit, the monetary standard 
plays a role almost exactly analogous to that played by 
the standard of liquid measure in fixing the capacity of the 
unit of liquid measure. In the United States, just as 8.33 
pounds of pure water determines the capacity of a gallon 
measure, so 25.8 grains of standard gold determines the 
value of one dollar. Ikit, in the case of liquid mensu- 
ration, it is evident that changes in the capacity of the unit 
take place when, and only when, a change in flic sfaiidard 
takes place. Thus, if a statute were to be passed changing 
the standard of liquid measure from 8.33 pounds of water 
to 4.165 pounds of water, the capacity of a standard gallon 
measure would be exactly cut in half, while the volume of 
every quantity of liquid measured in gallons and the cap- 
acity of every existing vessel would be exactly doubled. 
All persons who had occasion to reckon in gallons would 
promptlv adjust their computations to the changed standard. 
In measuring molasses or oil, the grocer would call the 
amount of liquid necessary to fill his old gallon measure 
two gallons. The petroleum well which formerly fiowed 
TOO barrels a day would now flow 200 barrels. The cistern 
which formerly held 50 barrels would now hold 100 barrels. 
And so on. 

Further, it is plain that, in this case of liquid measure. 
unless such a change in the standard were made, no material 



I'KIXCIl'I.I'.S C.OXI'.KNINC. ITS \'.\I,UE 189 

alteration in the capacity of the i^allon. or quart, or pint 
could take place, barring" inapprecial)le changes due to 
differences of temperature, all gallon measures hased on 
tlic same /(\i^a/ i^allojt staiuldrd will hold the same amount 
of li(|uid al all times, and a given volume of liquid will al- 
ways be expressed in the same number of gallons. In 
short, in the case of the unit of liquid measures, all we need 
to answer to the (|uestion, what regulates changes in the 
capacitv of that unit? is this: all chans^cs in the unit iniisf 
be effected hx eonseioiis rcadjitstiueut of that unit to a 
changed standard behind if. Hut, if this is the solution 
of our problem for li(|uid measure and if the relation of 
8.33 pounds of waler to the unit of liquid measure' is the 
same as the relation of 25.8 grains of gold to the unit of 
monev, is not the solution of our problem for money sub- 
stantialh- the same? Shall we not sa_\- that all changes in 
the value of the mone}' unit must l:,e effected by a conscious 
readjustment of that unit to a changed standard behind it? 
Doubtless, we should have to go somewhat further : since the 
value of the same standard is subject to change, and we 
should want to know the principle under which change 
takes place. Ihit our natural starting point, at least, would 
seem to be that all ch anges m ust im mediately co me from 
a readjustment of the money unit to a cJiange In the stand- 
ard. 

Xow, the preceding account of the matter has much 
plausibility : and in fact is in a general way supported bv a 
verv eminent living authority* upon mone\-. liefore we 
get through, however, we shall find it necessary to place 
such qualifications upon the principle that in the sequel it 
will seem to play a relatively small part in determining the 
value of monev. Xevertheless, it must be recognized as of 
sie:nificance in not a few cases ; and hence forms our third 
principle. 



*Professor Laughlin 



190 CIIAPTEKS OX MOXF.Y 

Principle 3. W'iiciicicr the coiidifioiis arc such that it 
is /possible for tlic i:;ciicral public to have fairly coitclusizfe 
cz'idcucc tliat a change in tlie ralue of the standard has 
taken place, and to haic a fairly frustwortliy index of the 
extent of said change, there ■leill almost certainly foflozv 
with measurable promptness a direct readjustment of geii" 
cral prices, i. e.. of the z'alue of money, to the changed 
standard. 

The argument for this principle is most naturally made 
in connection with the different cases which arise under it. 

Case I. A formal change from a standard consisting 
of a certain amount of one metal to one consisting of a 
different amount of the same metal. 

This is a case which could hardly arise in any decently 
governed modern country ; but it is a case which naturally 
comes first theoretically. Suppose that the government of 
the United States were to decide to substitute for its pres- 
ent standard, 25.8 grains of gold, one just half as large — 
12.9 grains. Surely no one can doubt that there would at 
once be a prompt readjustment of prices to the cheaper unit. 
That is. every grocer would hasten to mark the sack of 
Hour which had sold at 65 cents, up to $1.30, the sugar for 
which he formerly got 7 cents, up to 14. and so on. Sim- 
ilarly, drvgoods dealers, hardware men, and merchaats 
generally would promptly double all their prices. Xo one 
would think of waiting till the result was worked out by 
natural processes. Each would see that readjustment was 
effected without delay. 

Case 2. A formal change from a standard of one metal 
to a standard of another metal different in value. 

Let us suppose that at the present time, when 430 
grains of silver is worth about half as luuch as 25.8 grains 
of gold, the United States should decide to make 430 grains 
of silver its standard instead of 25.8 grains of gold. What 
would happen to the value of the dollar? Would it con- 
tinue to buv as much as now? Would the prices of goods 



ruixcii'i.is c.()\i;i<xi.\c. its n'ai.lic 191 

remain as low as at present.'' Surely not. Su|)i)osing' that 
silver remained at its present value in the markets of the 
world, i. e., that 430 grains continued to he worth ahout 
50 cents in gold, there would surel\' he an immediate ad- 
vance in prices and wages all along' the line. A modern 
business c(Mnniunity. alert, informed, prompt, would not 
wait to see how things were going to turn out ; hut would 
at once readjust their affairs to the new standard. 

Case 3. When the standard of any country is a metal 
which is a mere commodity in some great world market 
with which the said country maintains intimate trade re- 
lations. 

Until quite recently, this case was more or less fully 
realized in several countries which still maintained the 
silver standard. Of these the most important was India ; 
and experience there confirmed the truth of our principle. 
At that time as now, silver was, in London and other 
European centers, a mere commodity bought and sold like 
cotton or wheat. Naturally, it show^ed many fluctuations 
in price ; and every considerable fluctuation was followed 
by an opposite change in Indian prices. When silver fell, 
Indian prices rose ; when silver rose, Indian prices fell. 
That is, the value of Indian money was quickly readjusted 
to changes in the world price of silver. Advertisements of 
goods in Indian newspapers commonly contained a caution 
to the effect that the prices given were liable to revision 
if any change took place in the rate of exchange on Lon- 
don* — the rate of exchange on London being a trustworthy 
criterion as to the world price of silver. This result was 
of course just what we should have expected. If silver 
fell, the value of rupees in pence would fall, it would take 
more of them to buy the goods imported from Europe, and 
so the dealer would have to recoup himself by charging 



* So said the Rev. Dr. Craven, a returned missionary, in a 
Chicago paper in 1896. 



192 CHAPTERS ON MONEY 

more for the goods. Hut, if dealers in imported goods 
charged more, other people would have to do the same, or 
lose in the long run. Finally, if dealers generally charged 
more, laborers would have to do the same. Thus, a rise 
in prices begun in the import trade would be more or less 
rapidly extended all along the line.* 

Case 4. When standard money consists of irredeemable 
notes, changes in the value of which, as measured in the 
metal which was formerly standard, can be followed in 
the market price of said metal. 

This case was constantly illustrated in the American 
Civil War. Gold was at that time out of circulation and 
was speculated in just as cotton, wheat, copper, etc., are 
now. Great fluctuations in its price, measured in notes, 
took place from week to week, from da_\- to day, and even 
from hour to hour. But, of course, every change in gold 
meant an opposite change in notes ; and naturally every 
seller of goods hastened to change his prices so as to keep 
pace with the changes in the money which he received for 
his goods. That is, if notes fell (gold rose), the dealer 
advanced his prices. If notes rose, he lowered his prices. 
Doubtless, it would be wrong to represent prices as follow- 
ing promptly and precisely the changes in the value of 
money. Rut the correspondence was close enough to estab- 
lish our theorem. 

Case 5. When standard money consists of irredeemable 
notes, fluctuations in the value of which, as measured in the 
metal which forms the standard of the great world mar- 
kets, can be followed in the fluctuations in the rate of 
exchange on those markets. 

The rate of exchange, as we have already learned, is 
the price paTdin one country for the right to claim money 
in another country. Thus, the rate of exchange on London 
in Xcw ^'ork is the price which has to be paid in New 



* This paragraph overstates the case as respects tlie promptness 
and completeness of the movement. 



PRINCII'IJiS GOVKRXING ITS VALUE I93 

York in dollars for the right to claim a pound sterling- in 
London. Now, supposing our money unchanged in value, 
this price for London exchange has only a very limited 
range within which it can fluctuate, viz., $4,835 to $4.8()5. 
If, then, we should note in the newspaper an item that 
exchange on London was at $8, we should know that the 
value of our money had fallen greatly or that the value of 
English money had risen greatly. And, if England con- 
tinued to use gold as before while we had given up gold 
and were on a paper basis, we should be cjuite certain that 
our money had fallen in value. In consequence, dealers 
would hasten to mark their goods with higher prices, 
i. e., the value of our paper as money would be adjusted 
to its value in gold. In our own experience with paper, we 
paid little attention to this index of the value of paper, 
because we had an even better one in the market price of 
gold. But, frequently, countries having irredeemable paper 
as their standard do not maintain a gold market, in which 
case they treat the fluctuations of London exchange as sure 
indices of changes in the value of their notes, and readjust 
their prices accordingly. 

In introducing the last theorem, I remarked that in the 
end we should find that in a typical modern system the 
"readjustment" principle plays a relatively unimportant role 
in determining the value of money. I must now explain 
why this is so. In general, the reason is to be found in the 
fact that, in a typical modern system, wcdo not usually have 
any 7ray of ascertaining a change in the ivlne of the ulti- 
inafe standard, independently of changes in the value of ^ 
money. There is no wav of discovering a rise of erold ex- 
cept in the fall of prices, i. e., in a rise of monev. That 
this is bound to be the case is easily shown. 

(i) First, it is plain that, so long as gold is the 
standard in a given country, we can not ascertain any 
change in its value from a change in its price zinthin that 



194 CHAPTERS ON MONEY 

coiiitfry: for the price of the actual uhimate standard is 
by definition unclianging". It fixes the vahie of the money 
unit, and, therefore, a given quantity of it, measured in 
that unit, must always have the same value. As long as 
25.8 grains of gold is our standard, the price of an ounce 
of gold must be the quotient of 480 divided by 25.8, i. e., 
$18.60+. 

(2) In the second place, outside a few mining districts, 
there is no chance to ascertain any change in the value of 
the ultimate standard through an alteration in the exchange 
ratio between goods and the standard metal as a metal ; for 
direct exchanges between these do not take place. Wheat, 
corn, pork, steel, etc., are not being exchanged for grains 
or ounces of gold, save in a few isolated districts, but rather 
for dollars and cents. If these goods fall, they fall in 
terms of money, which of course leads us to say that gold 
has risen. But we know directly only that money has 
risen ; the rising of gold is an inference from the rising of 
money, combined with our previous knowledge that gold 
and money can not help moving together. ~ " ~' 

(3) In the third place, we have no way of ascertaining 
a change in the value of the ordinary standard, i. e., gold, 
from a change in its price in the market of countries where 
it is not the standard ; for there is no such market which 
has any weight in commercial affairs. It is true that in 
some countries having a paper standard, gold is openly 
bought or sold, and its price shows many fluctuations. But, 
then, these fluctuations are accepted by no one as indicating 
changes in the value of gold. Instead, every one looks on 
them as inverse changes in the value of the paper standard. 
Thev, therefore, furnish no clue by which dealers in gold 
countries could, or at least would, be guided in trying to 
readjust the level of prices. 

(4) Finally, we have no way of ascertaining changes 
in the value of the world standard, gold, from fluctuations 
in the rate of exchange on countries using some other 



I'RixciJ'i.ivs c.oxi-.Kxixc, ITS \:.\i.rp; 195 

standard. For, in this case as in the last, such llucLuations 
in the rate of exchange will universally be accepted as indi- 
cating changes, not in the value of gold, hut in the value 
of the standard of the outside country. If that oulside 
standard is paper, such a way of looking at the matter is 
of course inevitable and probably sound ; since it is mani- 
festly more likely that a pajier money confined to Argentina 
is changing than that all the gold of the world, whether in 
money or bullion, is changing. If the outside standard is 
silver, the inference from a fluctuation in the rate of ex- 
change that silver is, let us say, falling rather than gold 
rising is doubtless less certainly correct than the correspond- 
ing inference in the case of paper. But, whether correct or 
not — and the presumj^ion is in its favor — . this inference 
is the one inevitabl\- made in gold countries ; for. when a " 
change takes place in the value ratio between the standards 
of all the great commercial nations and that of two or 
three minor countries, men naturallv attribute the chang-e to 
conditions affecting the standard of the minor countries. 
Accordingly, it is entirely out of the question that dealers 
in America or England should look on a fall in the rate 
of exchange on China as indicating a rise in the value of 
gold, and, therefore, as something which calls for a read- 
justment of American or English prices to a lower level. 
It seems pretty conclusively established from the above 
argument that, in the present condition of things when gold 
is the standard of all great commercial nations, there is 
substantially no chance for changing the value of monev, 
in a country having the gold standard, by the readjustment 
process. Doubtless there have taken place changes in the 
value of money due to causes which would naturally tend 
to change the value of gold, the metal. But these and all 
other changes must have been effected by some proces.s 
other than the one according to which the value of the 
ultimate standard is first changed, and then the value of 



196 CHAPTERS ON MONEY 

money consciously adjusted to it. We must now try to 
ascertain what is this other process. 

In general, it is already clear that such a process neces- 
sarily involves a direct raising or lowering of the general 
level of prices. The v alue of money changes, only as the 
level of prices changes in the opposite direction. Ikit, if 
changing the level of prices can not be effected by a con- 
scious readjustment to a changed standard, it must be done 
through the process by which prices are automatically 
regulated. Now, in introducing our first principle, it was 
brought out that, generally speaking, price changes are 
automatically effected through changes in supply or demand 
or both, and in this way only. If the supply of goods in 
general increases, prices in general fall ; if supply decreases, 
prices rise. If the demand for goods in general increases, 
prices in general rise ; if the demand decreases, prices fall. 

That so)nc price changes are effected in the w^ay de- 
scribed, has already appeared. They are those changes which 
are brought about through alteration in demand or 
supply by causes affecting goods rather than money ; and 
so are merely relative changes in the value of money. But 
it is conceivable that changes in demand or supply, as re- 
spects goods in general, might be brought about by causes 
originating in money rather than in goods. Such changes 
would produce changes in the level of prices, which would 
be absolute changes in money because due to causes acting 
on money, although, superficially considered, these causes 
do the work by altering the demand for, or supply of, goods. 
Such changes would, therefore, illustrate a second process 
])v which absolute changes may be effected. That second 
process would be the only possible one other than the 
"readjustment" process already brought out under Prin- 
ciple 3 ; since, as already remarked, cons ci ous readjustment 
and automatic alteration through changes in supply or 
demand or both, are the only possible methods by which the 
general price level can be changed. If, then, it is possible 



pRiNcii'ij;s r.ovi;RXT\r, its VAi.ri: 197 

for al)solute changes in money to l)e l)rouglU about in this 
wa\'. we shall have one or more theorems eml)o(lving the 
principles which regulate what might be called "demand 
and supply" changes as distinguished from "readjustment" 
changes. 

Xow. it will not be difficult to show that changes of the 
sort considered do almost certainly take place, at anv rate 
tend to take place. Causes primarily affecting money itself 
or the ultimate standard, afmost certaTiil}' tend to influence 
the de mand for, or the supi)ly of, goods in general, and so 
tend, at least, to cause changes in the level of prices, which 
changes are l)y definition absolute changes in money. Thus, 
let us suppose that there takes place a very great increase 
in the output of standard metal, gold. Such an increase 
ought surely to lower the value of gold and, so, the value 
of money. But such a lowering of the value of gold must 
take the form of a raising of the prices of goods in gen- 
eral ; since there can be no change in the price of gold, it 
being the measure in wdiich prices are reckoned. The ques- 
tion then is. Would the supposed increase of gold tend to 
raise the prices of goods? As already explained, this result 
could not be effected in the case of gold, the world stand- 
ard, by the "readjustment" process. If, then, it is to be 
eft'ected at all, it must be because the increase in gold tends 
to cause an increase in the demand for goods. Does such 
a tendency exist ? That this question must be answered in 
the affirmative is easily made evident. 

In the first place, the tendency certainly exists and works 
out its natural results in gold-producing districts 
such as California and Australia furnished fiftv years 
ago. For in such districts the new gold was. to 
no little extent, used as money at once, in its bullion form, 
without waiting for the coinage process ; and the eager 
using of this new gold to buy the necessaries and luxuries 
which the hitherto poor miners craved, naturally led to a 
swift advance of almost all prices, i. e.. a swift fall in 



igS CHAPTERS ON MONEY 

gold. Doubtless the matter is by no means so simple for 
districts other than those where the gold is produced, nor 
even for the mining districts, as soon as placer mining 
has given wav to the systematic extraction of the metal 
with all the apparatus of modern discovery and invention. 
vStill. it would be hard to believe that there is no tendency 
for some such process to work itself out. even under present 
conditions. An addition of 200 million dollars worth of 
gold to the world's stock must surely tend to modify the 
gold, or money, demand for all goods other than gold, and so 
to modifv the value of gold as measured in those goods. 
And we can easily imagine a way by which the result might 
be accomplished. 

First, the new gold will, in considerable measure, become 
a part of the money stock. In the first instance, certainly, 
almost all of it is marketed into that stock : i. e.. it gets as 
far as the great central banks or even the mints of the 
different countries. Doubtless a considerable part is later 
withdrawn liy being sold to manufacturers who use it as a 
raw material in their several arts. But the rest is turned 
into coin and passes into the monetary stock of the world. 
I5ut this means a corresponding enlargment of the ultimate 
reserves to which gold money is largely relegated. _Tliis 
enlargment of the ultimate reserves, in turn, leads to an 
Lxpansion of bank credit, and so of general purchasing 
power. As a result, borrowers find it easier to get posses- 
sioirof~such buying power. If, on other grounds, they are 
disposed to go into the market as buyers of wheat or cotton 
or iron or other goods, this increased possible control over 
buying power leads to an enlarged demand for these goods. 
l')Ut this enlarged demand will tend to raise the prices of 
these goods, that is, to lower the value of the gold. 

In the preceding paragraph, it has been shown that an 
increase in the output of gold might be expected to cause 
a fall in the value of nione^\ and so of gold itself, by the 
verv roundabout process of increasing the dema'nd for 



I'KINCiri.KS COVJvKXlAG ITS VAI.UlC 199 

g oods jn^;en££aL and so r aising: tlie level of prices. The 
student can easily work out for himself an analogous course 
of reasoning to show that a decrease in the output of gold 
might he expected to decrease the demand for goods and 
so lower the prices of goods, i. e., raise the value of money. \l 
It is evident, therefore, that one might have absolute changes 
in the value of money. — changes having their cause in 
some condition affecting money itself or the ultimate stand- 
ard behind money. — which were affected through changing 
the demand"'" for goods in general. 

Princii^le 4. The ivliic of money tends to -vary inversely, 
tlioiii:;li not f^roportionally. as the qnantity in the eonntry or 
in the i^roiip of eoiintries hcwini;; the saine standard. 

The argument for this theorem has already been largely 
antici])ated. in showing that it is possible to have absolute 
changes in the value of money effected by the "demand 
and supply" process. The essence of that argument may 
be stated in a sentence ; changes in the quantity of monev 
tend to produce similar changes in the demand for goods 
which, in turn, tend to produce similar changes in the 
prices of goods, i. e.. inverse changes in the value of monev. 
If the volume of money greatly increases, people will have 
more money to spend. In spending it, they will demand 
more goods. More goods being demanded, prices will rise, 
i. e., mone}- will fall. If the volume of money is diminished, 
less can be spent ; fewer goods will be demanded ; and prices 
will fall. i. e.. money will rise. 

To modernize the argument, it needs to be developed 
in a way somewhat dift'erent, though it has alreadv been 
pretty well anticipated. .^ change in the^^olume of money 
will cause a similar change in the size of the bank reserves, 
which will lead to a similar change in their loans to dealers, 



*By somewhat subtler reasoning it might be shown that the 
supposed changes in the output of gold would tend to effect the 
results attributed to them by influencing the supply of goods in a 
direction opposite to their influence on demand. 



200 



CHAPTERS ON MONEY 



/ 



which will lead to a similar change in the dealers' demand 
for goods, which, finally, will lead to a similar change in 
the level of prices, i. e., an inverse change in the value of 
money. 

Caution. Under iiorntal conditions the inflnence of 
changes in the qnantity of nioney in general is so slight as 
scarce! \ to deserz'e consideration, and ez'cn the influence of 
changes in the quantity of standard money usually proves 
to be of comparatively small signiticance. 

That the value of money tends to vary inversely as quan- 
tity, assuming that sufficient emphasis is put on "tends," 
seems almost indisputable. Further, that cases arise 
wherein changes in quantity actually influence value, and 
that cases can easily be conceived wherein changes in quan- 
tity would be the decisiz'C factor in determining value, — 
these propositions seem almost indisputable. Nevertheless, 
there has been much in the attitude of both the general 
public and of some writers on money, to give considerable 
justification to the too-sweeping denunciation of the "quan- 
tity" principle which has marked several recent publications. 

As ordinarily understood, the quantity principle errs ( i ) 
jn ig)ion)ig other determining factorsin the level of prices, 
i. e., the value of money, and ^2) in grossly exaggerating 
the potency of quantity to influence value. A large number 
of people more or less conversant with money questions 
look on ever}- change in the level of prices as due to some 
change in the quantity of money, and expect from every 
change in the quantity of money a corresponding change 
in the level of prices. Now, it seems almost certain that 
the majority of the changes in the level of prices which 
take place from time to time have little or no connection 
with changes in the quantity of money, but are eflfected 
under the working of one or more of our first three prin- 
ciples. This is, they are merely relative changes in money 
caused by changes in business confidence, or in the cost of 
producing goods ; or they are absolute changes in money 



PRIXCIPLKS GOVKRNING ITS VALUE 20I 

effected through conscious readjustment to a changed stand- 
drd. On the other hand, experience gives us numberless 
cases of great changes in the quantity of money which 
have produced httle or no effect on the level of prices. 
Accordingly, we find it necessary to reject not only the 
popular tloctrine which assumes a constant and immediate 
connection between changes in quantity and changes in 
value, l)ut also the more moderate opinion which treats the 
"quantity" prindple as at least the regulative principle of 
the value of money, as compared with which none other 
deserves consideration. It is, therefore, necessary to append 
to the principle the caution given. 

The argument for the caution, as just hinted, is prima- 
rilv inductive. Experience shows quite conclusively that, in 
actual practice, the value of money exhibits little tendency 
to vary inversely as its quantity. Either the power of 
changes in quantity is very slight, or it is commonly neu- 
tralized by opposing causes. A definite and powerful ten- 
dencv of value to change inversely as quantity does not 
exist. But not only is our caution supported by experience, 
it is also confirmed by reasoning. Considering the con- 
ditions present, we should naturally expect experience to 
turn out as it does, (i) If we are considering periods of 
short duration, we should expect to find the tendency of 
changes in the quantity of money to change the level of 
pFices so feeble, as compared with other causes influencing 
the matter, that that tendency would be neutralized when- 
e'ver those other causes were acting against it, and would 
sig-nifv relativelv little whenever the other causes were 
acting with it. (2) If we are considering periods of long 
duration, we should expect to find the tendency of changes 
in the quantity of money to cause changes in the level of 
prices so slon' in operation that it would be completely, 
neutralized by other fundamental changes in conditions, or 
that at least the accomplishment of its work would be 



202 CHAPTERS ON MONEY 

delayed till the very condition causins: the tendency had 
been reversed. 

Let us develop the first case, that of short periods. 
Here the power of quantity to influence the level of prices, 
as compared with other forces present, is too feeble to be 
significant. For. in the first place, changes in the quantity 
of monev constitute only a secondary, indirect, remote. 
cause of changes in the level of prices, and as such are for 
short periods necessarily feebler than primary or immediate 
causes. As already brought out, the only way in which 
changes in the quantity of money can work changes in the 
level'of prices is b}- their influence on the dcmand'lor gooHs 
in general. But the least reflection will convince us that 
the primary cause influencing our demand for goods in 
general is. not the quantity of money available, but the 
desire to possess those goods. Now, the desire for goods 
which is felt by those people whose desire, in this matter 
of general prices, is significant, i. e.. dealers, is manifestly 
based on the expectation of profit. If any dealer thinks 
large profits are to be made in buying his particular line of 
goods, he is eager to buy: if he does not think such profits 
in sieht, he declines to buv. That is, changes in demand 
primarilv depend on changes in the dealer's estimate of 
business prospects. Doubtless, he can not buy unless he 
has other wealth which he can sell or hypothecate in order 
to get buying power. So that az'ailable buying pozcer must 
be looked on as an essential condition of bi\ying. But, after 
all, the primary cause of the buying is, not the possession 
of the buving power, but the inclination to buy, due to 
supposed prospects of profit.* 

To illustrate this point by analogy, I do not conclude 
to move to a new residence because Godfre\'s moving van 
happens to be in front of my door. If I decide to move, it 



*I seem to forget that abundance of buying power will increase 
the chances of profit. But see the next paragraph but one. 



i'Ki.\cii'i.i:s c.oxiiKxixr. i is \.\i.ue 203 

is because there is sonic material reason for preferring a 
new residence. Unless this is the case, the presence of the 
van will have no weight in the matter. Doubtless, if I do 
move. 1 shall need a van or some other vehicle ; and, of 
course, circumstances might arise when an almost com- 
pleted decision to move is quite ripened by the convenient 
presence of the van. lUit. obviouslw the availability of the 
van is not a primary cause in the case. 

Now, 1 would not deny that this analogy unduly min- 
imizes the significance of money. Changes in the avail- 
abilitv of buying power have more relalion to our demand 
for goods than changes in the availabilitv of vans have to 
our moving into a new residence. When 1 am inclined to 
buv wheat because I really want it. but am hesitating be- 
cause the prospective profit is not quite large enough to 
turn the scale, a drop in the rate of discount due to excessive 
bank reserves may tip the beam, by making the transaction 
a shade more profitable. But. after all. in this case, as in 
that of the moving householder, it must be presumed that 
there already exists a more real and ultimate cause of my 
action, viz.. a desire to possess the wheat. Without this 
desire, the wdieat will not be bought, however full the re- 
serves of banks, however low the rate of discount. If, at 
the time when money is abundant, there is ample reason 
for buving goods, all right. But if. on the contrarv. dealers 
have no confidence in the future and prefer to stay out of 
the market, the abundance of money has no power to in- 
crease demand or raise prices. Instead, demand declines 
,ever more antl more, and prices reach imheard-of depths.vx 
At the best, changes in the quantity of money* can do no |) 
more than neutralize, in some slight degree, or strengthen,^ 
in some slight degree, the power of the more real an( 
fundamental causes which are at work. 

But, in the second place, when short periods are con-. 



Unless of very great magnitude. 



204 CHAPTERS ON MONEY 

sidered, the power of changes in the quantity of money to 
neutraHze or strengthen the real causes of changing demand 
is, in a modern system, comparatively small. If dealers 
are really eager to buy and have the necessary wealth, they 
experience little difficulty in getting the medium of exchange 
needed to do the work. Booms seem almost as frequent 
and excessive in a depleted, as in a plethoric, condition of 
the monetary stock. On the other hand, if dealers do not 
care to buy, the abundance of money does not induce them 
to do so. Depressions seem just as deep and prolonged in 
a plethoric, as in a depleted, condition of the monetary 
stock. 

The explanation of this is to be found in the fact that 
the particular medium of exchange with which those 
transactions having most to do with determining the course 
of general prices are effected, possess in a high degree the 
property of elasticity. For the general course of prices 
(wholesale) is largely determined in the great exchanges 
where wheat, cotton, iron, petroleum, and so on, are dealt 
in. But the exchange medium employed at these markets 
is not money in the narrow sense, but rather credit. Cot- 
ton, wheat, and iron, are paid for with checks, and these 
checks practically never lead to a call for cash. Thus these 
transactions are carried on with what is commonly called 
deposit currency. But, with respect to this particular sort 
of circulating medium we can say with measurable accuracy, 
that it expands or contracts as it is needed, expands or 
contracts, indeed, with the expansion or contraction of the 
very business which uses it. Just because a dealer has 
bought 50,000 bushels of wheat, he can induce his banker 
to manufacture on his behalf say $30,000 in credit money, 
secured by that wheat and ready to be used in buying more 
wheat. The new wheat, in turn, can be made the basis 
of more bank credit, which again can be used in buying 
more wheat ; and so on. 

But here an apparent concession seems necessary. 



PRINClPLlvS GOVERNING ITS VAIX'K 205 

To the above account of the inalter, an important 
quahfication must be added. Beneath this highly expansible 
deposit, or l)ank. currency, there must always exist a 
basis of real money. Every new bank loan must 
involve setting aside a certain reserve of actual money 
behind that loan. J hit the importance of this concession 
is diminished by several considerations. First, the possible 
expansion of the loan is several times as great as the neces- 
sary addition to the reserve. Again, as booms are more or 
less local in character, reserve money inevitably flows into 
boom centers from other points. Finally, it is to be said 
that, in any case, the state of the reserves is not a primary 
factor in the case. It only comes in to reinforce or neu- 
tralize other more fundamental forces. For the primary 
conditions of the expansion of credit as a nicdiuin of 
exchange, i.e., of the lending of deposit credit, are tliese two: 
{1} The borrower thinks that business conditions are fay- 
orable, is, therefore, eager to buy and, hence, asks for the 
credit; and (2) banks believe that the prospects, and the 
propertv, of the borrower warrant making him the loan 
and, hence, grant the credit. If these two conditions are 
fulfilled, surplus reserves must go very low indeed before 
banks will stop lending credit, i. e., expanding deposit cur- 
rency. If these condilions are not fulfilled, even very large 
surplus reserves will have little effect in stimulating loan- 
making, i. e., in expanding deposit currency. 

We seem justified, then, in concluding that, if short 
periods onlv are considered, we should reasonably expect 
to find just what we do find, namely that the quantity of 
money has little to do with determining the demand for 
goods and, therefore, has little to do with determining price 
changes. Demand ex pands or contracts according to gen- 
eral business conditions, creating or destroying its own 
medium of exchange, as the need arises or disappears. 
For short periods, the analogy of the moving van and the 
householder is ahr.ost i)erfect. There is much money (much 



2o6 CHAPTERS ON MONEY 

circulating medium) because there is much buying of (de- 
m and f or) gopd^; the buying is not extensive •^^ecause 
there is much money. On the other hand, there is httle 
monev (circulating medium) because there is little buying; 
the buying is not reduced to small proportions because the 
stock of money is small. 

lUit. now. what is to be said with respect to the case 
of lojii!, time periods? Even if the weakness of changes in 
the c(uantit\- of money be granted when short periods are 
considered, does it not seem self-evident that, given time 
enough, these changes in quantity must count? During 
any one twenty-year period, let us say. the ups and downs 
of the general price level will be determined almost inde- 
pendently of the quantity of money. But, as between two 
such periods one of which has a circulation of $20 per 
capita while the other has $40 per capita, should we not 
necessarily have a dilTerence in the average level ? Should 
we not expect to find the high points higher, and the low 
points less low, in the latter case than in the former? 
Doubtless there seems to be on the surface some ground 
for an affirmative answer to this question, nevertheless the 
negative is more easily supported. 

The general nature of the argument has already been 
brought out. The tendency o^ changes in the quantity of 
money to eiTect changesTnThe level of prices is so sloi^', so 
[intefriTptcd, in its operation that, before its work can be 
cr6neV'(i) other counteracting forces are likely to come 
'into operation and {2) the very monetary condition re- 
sponsible for the tendency is quite likely to have been re- 
versed. This, of course, is a proposition the truth or falsity 
of which could be finally determined only by experience. 
But it has at least a fair presumption on its side. That the 
changing of prices through the changing of the quantity 
of money is bound to be a slow and often interrupted oper- 
ation, has alreafly been brought out. That counteracting 
forces are likely to ])ut in an appearance at almost any 



i'Ul NC1PI.es GUNliKNlNG ITS NALUE 207 

time, and that the very condition responsible for tlie ten- 
dency is Hkely to be reversed, can easily be shown. 

In the first place, there are always liable to be changes 
in the need or use for money or money metal, which changes 
naturally tend to neutralize corresponding changes in 
the quantit}- of money. Thus, there is always the 
possibility of a great expansion of commerce, or 
of the adoption of the gold standard by some 
one or more countries, or of an increase in the 
use of gold in the arts, or of a reaction toward more use of 
cash instead of checks ; and any one of these would plainly 
tend to neutralize the effect of an increase in the world's 
output of gold. ( )n the other hand, an extension of 
Anglo-American habits, with respect to the use of checks, 
to the countries of continental Europe and to other coun- 
tries where, at present, cash transactions are the rule, would 
diminish the need for money, and so tend to neutralize the 
effect of a falling-off in the gold output. Again, there is 
always liable to occur a change in the cost of producing 
goods ; and any such change would tend to neutralize the 
effect of an increase in the quantity of money. 

But not only does the slowness with which changes in 
the quantity of money (money metal) act, render it quite 
likely that counteracting forces will put in an appearance 
before any change in the price level has been produced : 
this same fact makes it quite possible that any given change 
in ffuantity may be replaced by a change in the opposite 
direction before the former has accomplished its task and, 
hence, the result may never be reached. For the pro- 
duction of gold has always been by spurts. A great in- 
crease in production has been followed after some years 
by a decline, this again to be succeeded by an increase, and 
so on. The Californian and Australian discoveries led 
people to expect a great fall in the price of gold, and some . 
fall doubtless took place ; but. by the time it had amounted 
to a tithe of what was expected, the production of gold 



2o8 CHAPTERS ON MONEY 

had considerably fallen off, and within twenty-five years of 
the Sacramento discovery the output had declined 50 per 
cent from the highest point. 

In the preceding discussion of the quantity principle, no 
pains has been taken to discriminate among different cases. 
But it should not be left without remarking that the prin- 
ciple is of very different degrees of significance in different 
cases. When a country has as its standard an irredeemable 
paper money, the influence of changes in quantity in mod- 
• ifying the level of prices is probably much greater than 
when the standard is some precious metal, silver or gold. 
Again, the influence of changes in quantity is probably more 
significant in the case of a country having as its standard 
a metal not commonly used by other nations, e. g., a country 
having silver at the present time. Changes in quantity are 
more significant in countries which make comparatively 
little use of credit, than in England or America where con- 
siderably more than half of all business transactions are 
effected through credit media of exchange. To show that 
these propositions must be true will furnish useful prob- 
lems for the student. 

Corollary i. The v alue of )iioiiey feu ds to var\ directly 
witli the quantity of standard niefal used in the arts.^ 

Any change in the quantity of standard metal used in 
ythe arts plainly means just so much less available for 
\ use as money. But the value of money tends to vary in- 
sversely as the quantity. Hence, it tends to vary directly 
^as the amount used in ihe arts. 

In view of what has already been said in discussing the 
Caution, it should be evident that this proposition is not 
of great practical significance. Changes in the amount of 
gold consumed in the arts have not constituted an important 
factor in determining the value of money. 

Corollary 2. The vdue of money tends to vary inversely 
as the stock of standard metal in existence, whether in the 
shape of money, bullion, or commodities. 



PRINCIPLIiS GOVERNING ITS VAI^UE) 209 

Since there is free coinage of standard metal, all of that 
metal in existence is potential money. Any change in the 
total stock will, therefore, tend to effect a similar, though 
smaller, change in the quantity of money. But this in turn 
tends to cause an inverse change in the value of money. 

Corollary 3. The va htc of money tends to vary in- 
versely, though far from proportionally, as the output of 
jtandard metal. 

This is ohviously a corollary from the preceding prop- 
osition. Changes in output tend to effect similar but 
smaller changes 'in stock. Changes in stock tend to effect 
inverse changes in value. 

It has already been brought out, in our discussion of the 
Caution, that the principle contained in the corollary before 
us has not proved of great practical significance. Changes 
in the output of silver or gold — the only two metals which 
have to any extent occupied the place of standard metal — 
have shown no such power to modify the value of those 
metals as similar changes in the case of wheat, or cotton, 
or iron, commonly show. In fact, there seem to be onlv 
two or three instances of such connection between output 
and value for which anything like a conclusive case can be 
made out. I have in mind, of course, the increase in the 
output of both metals which followed the discovery of 
America, and the increase in the output of gold which 
followed the Calif ornian and Australian discoveries.* Even 
in these cases, there is room for doubt. Certainly the claim in 
the second case is weakened by three considerations. First, the 
rise of prices which appeared between 1865 and 1874 might 
be plausibly represented as, in part at least, one of those 
price expansions which mark a boom period. Secondly, the 
rise in prices bore no sort of proportion to the increase in 



*Some are disposed to add the recent expansion of output 
following the South African and Klondike discoveries. I am not 
vet convinced. 



2IO CHAPTERS ON MONEY 

the stock of gold.* Finally, the advance in prices dis- 
appeared by 1875. 

Such being our experience with a change in gold pro- 
duction which was simply stupendous, it is of course ridicu- 
lous to expect that any material effect will be produced by 
ordinary fluctuations in output. It can only be said that 
the value of money toids, in a very weak way indeed, to 
varv inversely as the output of standard metal. 

These facts of experience are easily reconciled with the 
reasonable expectations of theory. We have already 
touched on the effect of neutralizing causes, such as the 
expansion of commerce, the adoption of the gold standard 
by new nations, and so on. One other point must be re- 
marked. 

Changes in the outputof gold can not materially affect 
its value, because they can not materially affect the total 
stock of gold. In the case of many commodities, as for ex- 
ample wheat, a doubling of the output means almost a 
doubling of stock ; since the yearly output is almost com- 
pletely and finally withdrawn from the market, before the 
next harvest. But with gold, things are very different. 
Its physical imperishability, its very high specific value, 
and its technical treatment as money, make it. economically 
considered, almost immortal. It is almost never consumed 
in the sense of being irrevocably withdrawn from the mar- 
ket. The untold accumulations of the centuries are in 
large measure available to meet the needs of today. In 
consequence, an increase or decrease in the annual output 
does not cause anything like a corresponding increase or 
decrease in the stock. In fact, the chief practical reason 
for stating this principle at all is to get an opportunity 
to emphasize once more the folly, alike of the anxieties and 



^Between 1850 and 1875 an amount equal to the total pro- 
duction for the preceding 357 years was added to the stock (Laugh- 
lin's Bimetallism). That is. the stock was much more than douhled. 
The rise in prices was perhaps twenty per cent. 



I'RIXCIPI.KS r.OVKI^NMXr, ITS XAI.UIC 211 

hopes, which people are led to iiulult^e in because of changes 
in the output of gold. Only such changes as are really 
stupendous can seriously affect its value. For only such 
can seriously aft'ect the volume of a stock which in value 
already amounts to many billions. 

Corollary 4. The value of money fciuls to vary directly 
as the expense of producing standard money metal. 

This follows from Corollary 3. A change in the expense 
of production is likely to be followed by an inverse, change 
in the output. If expense declines, profits increase, and. 
so, producers increase output.* If expense increases, profits 
decline, and, so, producers diminish output. But changes 
in output tend to be followed by inverse changes in value. 
Corollary 3. Hence changes in expense of production tend 
to be followed by like changes in value. 

As in the preceding cases, it must be said that the prin- 
ciple just laid down is of quite limited importance. This 
obviously follows from the fact already noted that the 
preceding corollary, on which this depends, is of very limited 
importance. Changes in the output of standard metal do 
not greatly affect the value of money, and. so, changes in 
expense of production, which act through changes in out- \ 
put, do not greatly affect the value of money. -^ 

But there is another reason for this conclusion, which 
we must note. In gold mining, changes in the expense of 
production do not bring about inverse changes in the output 
with anything like the promptness or certainty character- 
istic of many other industries. Gold mining is highly spec- 
ulative. The men who engage in it do so, not for the sake 
of earning a regular, constant, and reasonable return for 
their sacrifices, but with the hope of getting an extraordi- 
narily large, though only occasional, return. In large meas- 



*Circumstances are conceivable under which, though expense 
has declined, output can not, or does not, increase. In that case 
the result would not follow. But such a case would he quite ex- 
ceptional. 



212 CHAPTERS ON MONEY 

lire it can be said that their expectation is to gain a for- 
tune or nothing. To men in such an attitude of mind, a 
two or three per cent variation in average or marginal 
profits means nothing. Prove to them that, taking into 
account failures and successes, every ounce of gold taken 
from the Klondike has really cost $50, though worth only 
$20, and they would still go on mining it, exactly as the 
patrons of a lottery go on buying tickets, though convinced 
that on an average every dollar earned by this method 
re])resents twenty dollars of cost. Doubtless, these com- 
ments apply less to quartz mining than to placer mining, 
and less to all present day mining than to that of fifty years 
ago. But it is still true that the whole industry of gold 
mining is far short of being an industry in which changes 
in expense of production can be expected promptly to 
effect corresponding changes in value. 

Principle 5. llie vahic of money in any countrv or 
i^roup of countries having the same standard tends to 7'ary 
directly as the need for it. i. e., as the money work to be 
done. 

That changes in the need for money must tend to cause 
similar changes in its value would seem to be almost self- 
evident. Doubtless, as in the case of changes in quantity, 
the process could not be a direct one. Changes in need 
could not, as with ordinary commodities, change the mar- 
ket demand* for money and so raise its price. Monev has 
always the same ])rice ; and changes in its exchange value 
can never mean anything but opposite changes in the prices 
of goods. That is, if cha nges in the need for monev are 
to influence its value, they must do this by changing the 
level of prices : and. to do this, they must change the de- 
mand for, or the supply of, goods in general. But. while 
changes in the need for money must influence its value, 
if at all, by this roundabout path, they surely must tend to 



'Using the word in the ordinary sense. 



PRINCII'I.KS GOVERNIXC. ITS VAr.UIC 213 

do it. Let us see how it might be accomphshed. If we 
suppose an increase in the need for money without any 
corresponding- increase in the quantity, would this he hkely 
to increase the supply of goods, or decrease the demand 
for goods, in such a way as to lower the level of prices, 
i. e., to raise the value of money? For example, in the 
case of a panic the collapse of credit increases enormously 
the need for some form of money. Could this change in- 
fluence the supply of, or the demand for, goods? Surely 
it might. For dealers with pressing- money engagements 
to meet, if they were possessed of wdieat or cotton or other 
commodities, might be obliged to unload their holdings in 
quite unexpected amounts, thus lowering the prices of 
these commodities and, therefore, lowering the average 
level of prices. 

Again, let us suppose that some nation has just de- 
termined to adopt the gold standard, and, in the process 
of accumulating a stock of gold for reserve purposes, 
draws down considerably the stock of London or New 
York. Such a lowering of the reserves of a great com- 
mercial center would naturally cause the rate of discount 
to rise, which in turn might lower the demand of dealers 
for wheat or cotton or wool because making it difficult to 
get funds. This lowering of the demand for the com- 
modities would lower their prices and, so, the general price- 
level, i. e., would raise the value of money. Or it is possible 
that this same raising of the rate of discount would compel 
speculative dealers with large holdings, which they had 
bought with borrowed capital, to throw these holdings on 
the market, since at the higher rate of discount their pros- 
pect of profit was taken away. This unloading would of 
course tend to lower the level of prices, i. e., to raise the 
value of money. 

The above argument shows that an increase in the need 
for money would, in some cases at least, tend to cause an 
increase in its value ; and the reader will probably be dis- 



214 CIIAPTKRS ON MONEY 

posed to believe that, in almost any case which could be 
suggested, a little ingenuity would enable us to perceive 
methods by which an increase in the need of money would 
tend to effect an increase in its value. But, further, similar 
methods of analysis would almost certainly show that a 
decrease in the need for money would naturally lead to 
consequences precisely opposite to those just described, i. e.. 
fo a fall in the value of money. We may assume then as 
fairly certain, the proposition that changes in the need for 
money would naturally tend to cause similar changes in 
its value. 

Caution. Thc__tciidcncy of changes in need fo canse 
cliaiiges in the uahic of money is seldom of great practical 
sigiiifieanee. 

Under a good monetary and banking system there is 
ordinarily no difficulty in adjusting the stock of money to 
the changing need for money, without any alteration in 
value. In the first place, this adjustment is often brought 
about through geographical redistribution. For increased_ 
need does not necessarily show itself everywhere at once. 
In summer, when the country districts have greatest need 
for monev to move the crops, business in the great centers 
is more or less stagnant, and hence those places have less 
than the ordinary need for money. So, again, different 
nations do not often find themselves simultaneously ex- 
periencing a very great increase in the need for money. 
Accordinglv, anv one district or nation can usually increase 
its stock by drawing on that of some neighbor, — assuming, 
of course, that the two possess a common standard of 
value — ; and this it can ordinarily accomplish without caus- 
ing any considerable change in price level. For all ex- 
perience shows that, long before such change in price level 

is effected, movements of. money between nations are 

brought about through changes in the rate of discount. 

But, in the second place, a good monetary and banking 
system has in itself sufficient elasticity to adjust its volume 



pRiNcirr.ics r.ovKRMxc its value 215 

to all ordinary variations in need. As has been so often 
remarked, bank credit forms the circulating medium for 
a large class of transactions : and bank credit is a highly 
elastic currency, contracting or expanding as the need may 
dicfate. Even where some form of money is indispens- 
able, a good paper money will in large measure furnish 
the needed elasticity. 

Perhaps I ought not to leave this point without remarking 
that changes in the need for standard money are more likelv 
to result in changes in the value of money than changes in 
the need for money in general. Thus, if some nation which 
has had for many years a paper money system, decides to 
introduce the gold standard, the need for gold money which 
it now experiences will be more potent to influence the 
value of money than would an ecjual need for money in 
general. If it sets out to accunmlate a reserve of one 
hundred millions, this is nmch more likely to increase the 
value of money than would an effort to expand its ordinary 
circulation to a similar amount. This follows simply from 
the fact that, while the need of the ordinary circulation 
may be met by an expansion of the note issues, or of de- 
posit currencv, or of both, the need of the reserve can be 
satisfied with gold only. Consequently, means must be 
employed to draw on the great gold reserves of the world ; 
and, under normal conditions, the attempt to do so would 
involve a tendency to lower the prices of goods, i. e., to 
raise the value of money. Thus, a country undertaking this 
task would perhaps issue bonds to accumulate a gold 
reserve, arranging for the sale of these bonds in countries 
from which payment in gold could be secured. But this 
sale of bonds to the foreigner would put the country into 
a position where it would have to make regular interest 
payments to outsiders ; and, to do this without losing any 
of the gold just gained, it would have to stimulate foreign 
buying of its goods through lowered prices. Further, in 
the country from which the gold was drawn, the outgo of 



2l6 CHAPTERS ON MONEY 

the gold would tend to lower the bank reserves, and so raise 
the rate of discount, and so, finally, to cause a drop in the 
prices of staples, i. e., to cause a rise in money. 

But here, again, I must warn the reader against exag^ 
gerating the significance of the proposition before us. Tt 
is almost certain that, even in the case of standard money, 
great changes in need are commonly satisfied without any 
material efl^ect on the level of prices, that is, on the value 
of money. The men who have in charge the building up 
of reserves, appreciate fully the importance of accomplish- 
ing their task in such a way as to avoid any serious dis- 
turbance of existing conditions ; and, so wisely have they 
managed during the last twenty-five years, that almost 
every one of the six or seven important changes from 
silver, or paper, to gold has been effected without noticeable 
influence on the gold market. 

Corollary i. Tlic I'ahie of )itoitcy fends to vary in- 
versely as the extent to lehieh credit is employed as money. 

We have just seen that the value of money tends, 
though but weakly, to vary with the need for money. It 
obviously follows that any cause tending to effect changes 
in the need for money will tend to produce corresponding 
changes in its value. Such a cause is to be found in any 
marked change in the use of credit as a substitute for 
money. If, in a commercial nation which has been accus- 
tomed to use only cash in exchanging goods, there develops 
a general practice of using bank credit for the purpose, 
this will manifestly mean diminished need for money, and 
hence would naturally lead to a lower value of money. 

Corollary 2. ./ sudden and great deeline in comnie rcial 
credit is likely to .bring about a sharp rise i)i the value of 
money. 

This corollary covers a second important case wherein 
changes in credit are likely to cause changes in the value 
of money. This case arises, when in a country where 



PRINCIPLES GOVKRNING ITS VALUE 21 7 

credit is under ordinary circumstances extensively em- 
ployed as a medium of exchange, something- happens to 
bring about a temporary collapse of credit and, so, a tempor- 
ary shutting out of this method of making exchanges. In 
such a case, it is natural to expect that the enlarged task 
temporarily thrown on money itself, will cause a rise in its 
value. It seems probable that this consideration has a 
part, though by no means the largest part, in explaining the 
fact that, in the midst of a commercial panic, prices show an 
extraordinary decline. Since credit can not at such a time 
perform its usual share of the exchanging work, a larger 
burden falls on money proper. 

In the three principles just preceding, together with 
their corollaries, we have probably all the important pro- 
cesses whereby absolute changes in the value of money 
are brought about. We must now add a few principles 
which in part limit, in part apply, and in part supplement, 
these general principles. 

Principle 6. As compared zcith most other commodities 
the z'ohie of Jno)icy displays exceptional i>^crtia^r_ca^acitj 
to resist forces tending to produce change. 

It would not be difficult to make an argument for this 
proposition from experience, but it would be tedious and 
needless. The conditions with which we are dealing show 
that the statement must be true. Changes in the value of 
money are bound to be slower than, and slighter than, the 
changes which similar causes would produce in wheat or 
cotton or copper ; and this is true, whether the process by 
which the change is effected is that which we have called 
the readjustment process, or the demand and supply pro- 
cess. 

First, the readjustment process is bound to work 
less effectively in the case of money than in that of any 
other goods. If the price of wheat or cotton or copper 
falls in Liverpool or Paris or New York, it almost in- 
stantly falls everywhere else in like degree. But, if when 



2l8 CHAPTERS ON MONEY 

silver was the standard in India, its valne in New York 
or London fell, its value in India did not instantly fall to 
anything like the same amount. And this was perfectly 
natural. To adjust the New York value of copper to a 
change in the Paris value of copper, we have only to drop 
the New York price of that one commodity to its Paris 
price. But the case of money is very different. To adjust 
the Indian value of silver, when it was the monetary stand- 
ard, to a change in the London value of silver, involved 
moving the prices of all goods other than silver as far up 
as the Loudon price of silirr had gone dozi'u. But. as a 
matter of course, the second process takes more time than 
the first. To change the prices of a thousand commod- 
ities is a much larger task than to change the price of one 
commodity. The raising of the price of any commodity is 
more or less strenuously resisted by almost every con- 
sumer of that commodity. The lowering of the price of 
any commodity is more or less strenuously resisted by almost 
every seller of every commodity. When the prices of a 
thousand commodities are to be changed, the resistance 
is. broadly speaking, a thousand times as great as when 
the price of only one is to be changed. It is. therefore, 
perfectly reasonable to expect that the process of readjust- 
ing the value of the money of a country to a change in 
the value of the standard, brought about in some other 
market, would be a much slower one than a similar process 
of readjustment in the case of an ordinary commodity. 

In order to strengthen this presumption from general 
considerations, let us follow the working out of such a 
process in a hypothetical case. Suppose that, at a certain 
time when India had a silver standard, the price of that 
metal were to fall lo or 15 per cent. As we saw above, 
page 191. the rate of exchange on London would be 
promptly adjusted to the new London price of silver. 
Further, the prices of imported goods would be quite 
promptly adjusted. But the next step would take more 



I'Kixciri.i'S (".()vi:rxi.\c. its value 219 

time. The prices of home goods would of course rise 
in time, as the forces of competition worked tliemselves out, 
but much more slowly. For the necessity and reasonable- 
ness of the change is l)y no means so evident as with im- 
ported goods. The fall of silver in London makes the 
cost of goods, bought from London with silver, higher; and, 
so, of course their prices would have to rise, lint home 
goods, the raw material and labor for which were bought 
at the old price, would not have cost more, and it is not 
so plain that they would need to sell for more. Doubtless, 
a readjustment must in the end take place. The com- 
petition of foreign buyers will tend to raise the prices of 
those home goods which are exported ; since the money of 
the foreigner will buy more Indian money than before, and, 
hence, will buy more Indian goods at the old prices, thus 
making purchases from India specially profitable. But 
this will not be anything like instantaneous ; since the Indian 
producer, though selling at the old prices, will continue to 
make a profit until the rise in prices has come to afifect 
raw materials and labor. 

But, if the extension of the rise in prices to Indian pro- 
ducts is somewhat slow, its extension to Indian labor is 
slower still. It is a familiar commonplace that, in a period 
of in flation, wages rise las t. This is especiall}- true in 
countries where labor is ignorant, unambitious, and un- 
organized. But it is in great measure true everywhere, 
the laborer is not in a position to inform himself as can 
the trader; he is not in a position to use the information 
when he has gained it. He has small resources to tide him 
over a period of illness. He can not easily emigrate. And 
so on. 

It perhaps should be added to all this that there are 
quite a number of cases where custom or convention has 
made prices or wages almost absolutely fixed. For ex- 
ample, every one expects to pay 5 cents for a loaf of 
broad, five or six cents for a quart of milk, 5 cents for soft 



2 20 CHAPTERS ON MONEY 

drinks, for beer, and so on. The fees of doctors in a conn- 
try village remain substantially the same for many years. 
In short, wages and prices have a sort of inertia which 
any cause of change must overcome. They resist change 
until the force tending to cause change has become ex- 
ceptionally strong. Accordingly, while India was bound 
to adjust the value of its money to a change in the world 
price of silver, the process was in fact a slow one ; and so 
it would always be with changes in the value of money 
which had to be effected by the readjustment process. 

We have just seen that changes in the value of money 
by the readjustment process are necessarily slow. It is not 
difficult to show that the same is, in a far higher degree, 
true of changes effected by the demand and supply pro- 
cess. Of course the effecting of such changes must mean, 
as before, changing the prices of all goods other than 
money. And this changing of the prices of all goods is 
a more difficult process than before. In the first place, 
prices and wages show the same inertia, only in far higher 
degree. When the London price of silver falls, every buyer 
sees that it is reasonable that London goods should have 
a higher price in silver than before. But, when there is 
no such outside criterion of changes in the value of the 
standard, the case is quite different. Gold is the standard 
of substantially all important commercial nations. Outside 
those nations, there is no market where it is bought and 
sold like wheat or cotton or copper ; and so there is no 
place where changes in its value show themselves in fluctu- 
ations in its price, as is the case with silver. Is gold worth 
less than it was two years ago? This question can be 
answered only by studying those very prices which must 
be changed in order to bring about such a change in the 
value of gold. Lintil, therefore, prices have risen, proving 
that gold has fallen, vou can not convince buyers that it is 
reasonable for prices to rise. Accordingly, there is nothing. 



T'RFNCIIM.I'S (U)VERNING ITS VAI.UF, 221 

as in the former ease, to reconcile iheni to an advance in 
prices. On the other hand, in the case of increasing value 
of gold, there is a similar lack of criteria outside of prices, 
and so there is nothing to reconcile sellers to the fall in 
prices involved. They not only do not see a reason for 
change, they feel sure that change would be wrong. 

The above argument was based on the negative con- 
sideration that there is lacking an index of changes in the 
value of money to reconcile buyers to a raising, or sellers 
to a lowering, of prices. It ought to be added, to strengthen 
this argument for the inertia of a given price scale, that 
the habit of employing anything as the measure of other 
things mightily strengthens its inertia, its power to resist 
change. The value of monev, being constantlv treated as 
a proper measure of the values of all other things, inevit- 
ably gets to be thought of as itself undergoing no change. 
Every teacher of economics learns that it takes much effort 
and patience to get the average student to realize that 
money can change in value at all. What is true of the 
student is even more true of the general public. To them, 
unless just having passed through a campaign of education, 
changes in prices are changes in the value of goods only, 
not changes in the value of money. A dollar seems worth 
the same to them, unless there has been a decided change 
in their own economic condition ; i. e., unless they have 
grown richer or poorer. Hence, fancying a dollar to be 
worth the same always, they tend to insist on keeping it 
worth the same, — they insist on getting just as much for 
it, or giving no more for it. 

In the second place, while the inertia of prices, when 
chan ges can not be effec ted Tw the readjustment process, 
is stronger than in the other case, the process by which the 
change is brought about is a less direct and less efficient 
one. When India had a silver standard, changes in the 
value of which could be followed in the fluctuations of its 
London price, the self-interest of all importers inevitably 



22 2 CHAPTERS ON MONEY 

drove them to adjust their prices directly: that is. a certain 
group of persons were consciously and, as it were, openly 
commissioned to readjust Indian prices to the new level of 
silver. Lkit. when most of the world has a gold standard 
the changes in the value of which appear only in price 
changes, the value of money must be worked out, so to 
speak, by money itself. Thus, increased quantitv must 
cause increased demand for goods and, so, higher prices, 
i. e., cheaper money. Or, diminished quantity must cause 
smaller demand for goods and, so, lower prices, i. e., dearer 
money. But, as we saw, a few pages back, the working 
out of these processes is very slow and of little efficacy. A 
great increase in the quantity of money takes place without 
any appreciable effect on the demand for goods and, so, 
without any appreciable effect on the level of prices. And 
a precisely similar statement may be made with respect to 
a diminution in the quantity of money. 

Accordingly, we seem justified in affirming that the 
value of money shows exceptional inertia, exceptional ca- 
pacity to resist the forces which tend to produce change. 

Corollary. The li<-ibilityjil air}^ 'i'^/t// fo show fJiictua- 
tioiis ill laliic I'arics iiiz'crsely as the extent to ichieh it is 
eniployed as a standard of -value. 

Making a certain metal the monetary standard of any 
country fastens it securely to the money of that country. 
Whatever value the money has, the metal must have, and 
■vice zersa. But the value pf the money is steadier, just 
because it is money. TIence, the value of the metal, being 
tied to that of the money, must also be steadier. Thus, 
making a metal the monetary standard for a country tends 
to diminish its liability to fluctuate in value. But, if mak- 
ing it the standard for one country has this tendency, mak- 
ing it the standard for a second country will increase this 
tendency; making it the standard for a third country will 
increase it still further ; and so on. 

Principle 7. TAcI'SlP'^'fy (^f '' money to show Huetiia- 



I'KLxcirr.ics govi;kxixc. its value 223 

//('/;.s- /'// -c'aliic is reduced to a iiiiitiiiiinii by hai'iiii^ for its 
standard a uictal which- is the money standard of substan- 
tially all important commercial countries. 

This principle may be defended by treating' it as a 
corollary under the preceding" principle. The liability of a 
metal to fluctuate in value varies inversel\- as the extent of I 
its use as a monetary standard. But a metal universally / 
used as a standard has the greatest possible extent of such ^ 
use ; and, so. its tendency to fluctuate will be reduced to \ 
a minimum. But the value of the money stays with the \ 
standard, hence the tendency of the money to fluctuate will ) 
be reduced to a minimum. -^^ 

But there is a second and independent argument for this 
principle. As we have seen, there are two processes whereby 
money can be changed in value, the readjustment process, 
and the supply and demand process. Now, if we shut out 
one of these altogether, particularly if that one be the more 
effective, we reduce to a minimum the tendency of money 
to change. And this is just what we do by making a 
standard universal. If practically all great commercial 
countries have a gold standard, there is left no market 
where changes in the value of gold as measured in price 
can be followed, and, hence, there can be no readjustment 
of prices to changes in the price of gold. In such a case, 
therefore, changing the value of money by the readjustment 
process is shut out. But. finally, in shutting out this pro- 
cess, we shut out the more effective of the two, as alreadv 
brought out in discussing Principle 7. 

I will now add two principles of minor importance, the 
reasons for which I will leave the student to suggest. 

Principle 8. // a country has as its standard a metal 
which is a mere commodity in the principal zvorld markets, 
and if said country maintains trade relations iwth said- 
world markets, it seems certain that the I'alue of the money 
of that country is chiefly determined under the readjust- 



2 24 CHAPTERS ON MONEY 

incut principle; i. c, the value of the standard metal is 
first detennined by the usual lazvs of price in the world 
markets, and the value of the money in said country i^ 
then adjusted to that of said standard metal. 

Principle 9. If a country has as its monetary standard 
irredeemable paper, it seems probable that the ■z'alue of its 
money is most largely determined through the readjust- 
ment process, particularly during any period of rapid 
. chano-es in value. 

Corollary. In periods marked by great tluctuatio)is in 
governmental credit, the -c'alue of irredeemable government 
paper seems to depend chiefly on these fluctuations, varying 
inversely zvith them. 

IV. CRITIQUE OE SOME EALSE OR ONE-SIDED THEORIES. 

As respects not a few problems of political economy, 
the furnishing of sound principles is, if anything, less im- 
portant than the expelling of unsound ones. If people, 
though ignorant as to the proper course, are yet fully in- 
formed as to the paths to be avoided, they are more likely 
to escape doing the wrong thing, by doing nothing, which, 
indeed, is often the best course on other grounds. In 
the case before us, this is especially true. False doc- 
trines with respect to the determination of the value of 
money have been extremely harmful in actual legislation. 
It, therefore, seems best to supplement the statement of 
principles already given, with a criticism of false doctrines. 

t/ A. The Quantity Theory. 

In its cruder forms, the so-called quantity theory is one 
of the luost troublesome, perhaps one of the most dangerous, 
of the false or one-sided theories. First, it keeps the public 
in perpetual and quite needless anxiety for fear there will 
be a discrepancy between the quantity of money and the 
need for it, sufficient to cause a material change in the level 



PRixcirr.KS r.nvKRXTxc rrs value 225 

of prices. Thus, when there is a great increase in the ])ro- 
(hiction of standard metal, one class of persons look for- 
ward witli fear and trembling toward an era of "inflation," 
perhaps even go so far as to agitate for a change* of 
standards, because they expect inflation to bring about a 
great fall in mone\-. On the other hand, when there occurs 
a falling oil in metal production or when some new nation 
adopts gold as its standard, a dififerent class of persons are 
consumed with anxiety lest there should result a great fall 
in prices, i. e.. a rise in the value of money. 

Again, the general acceptance of a very crude form of 
the quantity theory keeps the public in constant error as 
respects the explanation of any actual change in prices 
which seems to them undesirable. Every rise in prices is 
a result of inflation.! On the other hand, every fall in 
prices, even if it afifects only one or two commodities, is a 
result of contraction. And, since any fall in prices is 
looked on by an intensely industrial people as a great ca- 
lamity, such a condition at once sets up a propaganda for 
more money, which soon acquires the tone of a crusade 
against human slavery or some equally monstrous social 
wrong. 

Finally, the crude quantity theory keeps the public per- 
petually in error as to the proper remedy for untoward 
price conditions, particularly a condition of falling prices. 
A low level of prices, which, if due to money at all, must 
connect itself with standard money, it is proposed to remedy 
by issuing more government notes, or more fiat silver. 
WHiereas, if anything in economic science is certain, it is 
this, that, so long as we maintain the gold standard, we can 
not materially inniience ilie level of prices, however much 
we mtlate tKe" subordinate currencies. 



*This was the case between 1850 and i860. 

t Closely allied is the readiness to explain every export of gold 
as a case of Gresham's Law. 



226 CHAPTERS ON MONEY 

But, although the quantity theory is troublesome and 
dangerous, we have already pointed out its more important 
qualifications. We will, therefore, content ourselves with 
making several statements which may be taken as a sort of 
summarv of the whole matter. First, it is always possible 
to conceive changes in the quantity of money so great that 
they would efifect opposite changes in its value. Consequently, 
the quantity doctrine furnishes a convenient logical instru- 
ment for dealing with quite a number of money prob- 
lems. Secondly, in rare cases, e. g., that of an isolated dis- 
trict devoted to the mining of standard metal, the quantity 
of money is actually tlie potent factor in determining its 
value. Thirdly, in rare cases, there occur changes in the 
world's stock of standard metal so stupendous that they 
actually influence the level of world prices, i. e., the value 
of money. Finally, looking at the matter broadly, having 
in mind the total of changes in the quantity of money, on 
the one hand, and the total of changes in the level of prices, 
on the other, it is to be said that there is comparatively 
little causal connection between them : there is little danger 
in ignoring the quantity doctrine altogether. 

B. The Fiat Theory. 

One of the most notable and pernicious of the various 
false or defective theories with respect to the value of 
money, may be called the Fiat theory. Briefly stated, this_ 
theory teaches that the value of money is determined by 
the mere decree of governmeiit. In other words, if the 
law says that a piece of paper or a disk of metal shall be 
worth one dollar, such piece of paper or disk of metal will 
have the value of a dollar without any respect to its value 
as a piece of metal, or to the quantity of it issued, or any 
other condition whatsoever. It is usually understood that 
making the given object a dollar also involves making it 
a legal tender for all purposes, including payments for 
taxes, and so on. The phrase "without reference to its 



PRINCIPLES GOVERNING ITS VALUE 227 

value as a piece of matter, or the quantity of it issued," etc., 
must be emphasized ; since, if it were necessary to choose 
some substance worth a dollar or to restrict the amount 
to some definite sum, then it would be the value of the 
substance or the limitation of the quantity, and not the 
mere decree of goveniinent. which serves as the effective 
cause in maintaining^ its value. According to this theory, 
the law can by simple decree make pieces of silver having 
a value of thirty-eight cents, or pieces of paper having 
no value whatever, worth one hundred cents. 

Now, of course, there is a sense in which the proposition 
set forth as the gist of the fiat theory is quite undeniable. 
Government can so legislate as to give the iioniiiial value 
of one dollar to anything it may choose. It has onlv to 
make that thing the sole legal tender or the cheapest of 
several legal tenders. (See Chapter V.) But I hardly 
need say that the fiat theory means much more than this. 
It means that the thing in question will be worth one dollar 
in real value, in power to buy goods ; so that, if before the 
decree one dollar would buy two bushels of potatoes, this 
W'ill continue to be the case after the decree. This plainly 
is a very different matter, and quite contrary to what we 
have assumed to be the truth. We have said that, if the 
government decided to put 12.9 grains instead of 25.8 
grains into the dollar, it would thereby make the dollar 
worth only half as much as before. This fiat theory, on 
the other hand, says that the change indicated would make 
12.9 grains worth as much as 25.8 grains had formerly been. 

Now, it hardly seems necessary to argue against so 
ridiculous a notion. Yet its acceptance by very many per- 
sons in every community forbids our passing it by. Per- 
haps the method of reducing it to an absurdity is the 
easiest to apply. Let us suppose that the government de- 
cides on the policy just indicated, putting 12.9 grains of 
gold into the standard dollar. Let us suppose, further, 
that this policy works as claimed by the advocates of the 



228 CHAPTliRS ON MONICY 

fiat theory; that is, the new dollar of 12.9 grains proves 
to be just as valuable as the old one of 25.8 grains. Now, 
since gold is freely coined, the bullion outside and that in 
the coins must have the same value. (See page 166.) 
But, by hypothesis, the 12.9 grains in coin form have been 
doubled in value, therefore, all the gold bullion in the world 
must by the same decree be doubled in value. Let us go 
on. Suppose the next year we pass another law, putting 
6.4 grains into the dollar, thus again doubling the value 
of all the gold in the world. A year later we make it 3.25 
grains, then 1.6, and so on. If the theorv were correct, by 
a mere change in our law we could make one millionth of 
a grain of gold worth as much as 25.8 grains now are. 
Would anyone have the hardihood to make such a claim as 
this? Surely, a theory which leads to such a conclusion is 
quite untenable. 

15ut thus far, in dealing with the fiat theory, I have 
supposed that the law took, at each change, a smaller 
amount of the same metal. Now this is perfectly fair, for, 
if the tlecree of government alone can fix the value of the 
money, there is no reason why it should not act on the 
same metal all the time. But the theory we. are considering 
has more often been applied in connection with a scheme 
for introducing a difl:'erent metal as standard. Is such a 
case materially different? Let us suppose that the govern- 
ment decides to make the standard dollar no longer from 
25.8 grains of gold, but from 412.5 grains of silver, the 
latter being now worth less than half as much as the gold ; 
would the change result in making the silver worth as much 
as the gold? Doubtless the increased use of silver as 
money would of itself tend to increase its value, just as 
the increased employment of copper in electrical industry 
tends to raise its price. But this particular effect of the 
change in the law — an effect which would almost certainly 
be very small — is not at all what the believer in the fiat 
theorv has in mind. He claims that the decree of govern- 



I'KIXCII'I.l'S C.ON-liRXIXC. ITS VAF.UE 229 

mcnt, as such, i^ives to the silver the vahie named, at once 
and absolutely. 

As before, the absurdity of such a claim is best brouj^ht 
out by showins^- the consequences to which it leads. Since 
silver is to be freely coined, silver bullion will necessarily 
be raised in value as much as silver coin. That is, it is not 
merely necessary that the decree of government shall (loul)le 
the value of every 412.5 grains of silver which is made 
into a dollar, it would have to do the same thing for all 
the silver bullion in the world. Would the fiatist be able 
to claim this? If he says yes, let us make a similar but 
stronger hypothesis. Suppose the government decides to 
make the standard dollar from a pound of copper, which 
is commonly worth from ten to fifteen cet'ts or one-eighth 
of a dollar. According to the fiat theory, this would make 
the copper in the coin worth eight times as much as before : 
and. since the metal is freely coined, all the copper in the 
world would be multiplied in value eight times by the 
mere decree of government. Would the advocates of the 
theory in question go so far as this? If yes, then let us 
suppose the government makes the standard dollar from 
a pound of pig iron which is worth, say, one cent. Will 
this action of our Congress make every pound of iron in 
the world worth one hundred times as much as before? 
If he still says yes, let us take a pound of clay worth, sav. 
one-twentieth of a cent. Would any one have the hardi- 
hood to claim that the mere decree of government could 
multipl}' the value of all the clay in the world two thousand 
times ? 

But to make assurance doubly sure let us compare this 
case of money with the analogous one of liquid measure. 
As we learned earlier, the law by decreeing that a vessel 
which will hold just 8.33 pounds of water shall constitute 
a gallon measure, fixes for the whole country the capacitv 
of the gallon measure. Let us suppose that after a political 
campaign fought on this issue. Congress concludes to 



230 CHAPTERS ON MONEY 

change the law so that a vessel which has the capacity to 
hold 8.33 pounds of sulphuric acid shall constitute a gallon 
measure. Now, sulphuric acid is about twice as heavy as 
water, and so of course 8.33 pounds of sulphuric acid will 
fill about half the space that 8.33 pounds of water fills; in 
other words, 8.33 pounds of sulphuric acid will fill a lialf 
gallon measure of the present standard. Now, what will 
ht the efifect of the decision of the government making 
sulphuric acid the standard ? The believer in the fiat theory 
ought to answer that the action of the government would 
cause the sulphuric acid to expand to twice its present 
size, so that henceforth it would fill a gallon measure in- 
stead of a half-gallon measure. Hut of course he would 
admit at once that this is nonsense, that the action of the 
government, instead of increasing the space-filling power 
of the sulphuric acid, would cut in two the gallon measure, 
would make it just half as large as at present. But what 
is true in the case of liquid measures is substantially true 
of value measures also. Making a certain quantity of some 
metal which has a value different from the old standard, 
equal to a dollar by legislation is a process whereby gov- 
ernment chaiio^cs the Tahtc. not of the metal, but of the 
doUar. 

In dealing with this fiat theory, I have neglected what 
is historically its most common application, viz., irredeem- 
able paper money ; for it was in connection with the paper 
money agitation that this theory first obtained vogue, 
though its most important recent application was to the 
controversy over silver. According to the fiat doctrine, 
governments can issue printed pieces of paper not redeem- 
able in anything and, by merely decreeing that they shall 
be worth a dollar, really make them so, i. e., make them 
able to buv just as much wheat as a dollar would buy when 
the change was made. Here again the reductio ad absiirdum 
is perhaps the most effective argument. But I will leave 
the student to work it out for himself. (See Problem 18.) 



TRIXCIT'I.KS GOVERNING ITS VALUE 23I 

C. The Mint-Price Theory. 

We come next to a theory as to how the vakie of money 
is determined, which had some vogue during the poHtical 
campaign of 1896 and which, for want of a better name, 
we will call the Mint Price Theory. At bottom, this is 
probably a confused, but somewhat less crude, version of 
the fiat theory. It may be stated as follows : When a 
g'overnment determines what is known as the mint price 
of the standard money metal, i. e., when it fixes the rate 
at which the mint will freely coin that metal, it formally 
or virtually agrees to buy that metal at the mint at a fixed 
price in unlimited amounts. Thus the United States will 
give coined gold, or its equivalent, for all standard bullion 
brought to it, at the rate of $18.60 per ounce. But, when 
any buyer takes such a position with relation to any com- 
modity, that is, when he buys all that is brought at a fixed 
price, he necessarily makes that price the market price for 
all buyers ; since, so long as he will take all that comes at 
the figure in question, no one else can buy the stuff for a 
smaller price. Consequently, any government, in fixing 
the mint price of the standard money metal, thereby de- 
termines its value and, so, the value of the money of the 
country. 

Now. a little reflection will show that this doctrine is 
only our old friend, the fiat theory, in a new guise. For 
all that the law accomplishes, in fixing the mint price of 
a metal, is to determine the nominal valuation of the coins 
to be made from a certain quantity of that metal, and, 
therefore, to determine, in case of free coinage, the nominal 
value of that metal in coins made from itself. In our 
case, the law says that an ounce of standard gold shall be 
made into $18.60, or 25.8 grains into one dollar. It thereby 
establishes for the United States this equation : 

The value of one dollar = the I'alue of 25.8 grains of 
gold. 



232 CHAPTERS ON MONEY 

Now this equation gives to 25.8 grains of gold the 
nominal vaUie of one dollar. But real value it determines 
only for the dollar; not for the gold. If the law changes 
the equation so that it reads : 

The z'aliic of one dollar = the value of I2.p grains 
of gold, 

this changes the real value of one dollar, but only the nom- 
inal value of the gold. Twelve and nine-tenths grains of 
gold are worth no more than before, but the value of the 
dollar is cut in two. In like manner, if we decide for the 
free coinage of silver and make its mint price $1.16 per 
ounce, or $1 per 412.5 grains, we of course establish a new 
equation : 

The value of one dollar = the value of 412.J grains 

of silrer. 

But this, again, will fix, not the second member of the 
equation, but the first. As far as real value is concerned, 
we shall have changed, not the silver, but only the dollar. 
Silver will buy no more potatoes, nor wheat, nor iron than 
before ;* but the dollar will buy less than half as much. 
That this must be the correct view is evident from the 
absurd consequences which follow from the opposite one. 
If the government can make silver worth $1.16 per ounce, 
as measured in the present dollar, by making this the coin- 
age rate, it can by the same process make an ounce of 
copper, costing a cent or less, worth $1.16. In other words, 
it can multiply the value of copper 116 times. If this is 
not enough, it can do the same for an ounce of iron worth 
less than 1-16 of a cent. Finally, there is no reason why 
it should not make an ounce of earth from the garden 
worth $1.16. 



* Free coinage would probably increase somewhat the real 
value of silver; but not because it makes flu- mint an unlimited 
buyer. (See under the Bullion Theory.) 



PRINCIPLES GOVERNING ITS \^\LUE 233 

But the reader may ask. how could so ridiculous a 
doctrine deceive any one? I answer, simply the ambiguity 
in the words "buy" and "buyer." For, from the stand- 
point of formal logic, the argument is all right. An un- 
limited l)uyer can maintain any price he fixes on. So long 
as j\Ir. Leiter, or anybody else with adequate capital, 
agrees to buy wheat at a dollar per bushel, other people 
must pay that price. But, now, the buying of money metal 
by a mint has a peculiarity of much importance. Of course 
it formally means, as usual, the giving of money for some 
goods or other. But, in the case with which we are deal- 
ing, the goods bought with the money are really only the 
money paid for those goods in another form ; and, in like 
manner, the money which is paid for the goods is only 
the goods bought in another form. That is, when we say 
that the mint is an unlimited buyer of gold at $18.60 per 
ounce, we mean nothing more than that the mint will give 
gold in coin to the value $18.60 for gold uncoined to 
the amount of an ounce. Now, it is convenient sometimes 
to call this process "buying" gold ; but we must not forget 
that it is a sort of operation very different from buying in 
the usual sense. The mint's pursuance of this policy will 
of course make every ounce of gold bullion worth $18.60 
in gold coin. But, plainly, it has nothing to do with fixing 
the value of gold as measured in other things, — sugar, 
coffee, potatoes, or in some other money, say, Mexican 
silver. That is, the government's unlimited purchase of 
bullion at a fixed price merely fixes the noiniiial value of 
that bullion, or the value of that bullion as measured in 
itself. 

The case would have been just the same, if we had taken 
silver instead of gold. The decision to buy, in the same 
sense, all silver brought to the mint at $1.16 per ounce 
would undoubtedly make silver worth $1.16 per ounce as' 
measured in silver money. So, in like manner, a resolution 
of government to buy all lead brought to the mint at $1.16 



234 CHAPTERS ON MONEY 

per ounce would make lead worth $i.i6 as measured in 
lead money. So, likewise, a law to buy all the clay that 
should be brought to the mint at $i.i6 per ounce would 
make clav worth $i.i6 as measured in clay money. But. 
manifestly, these would all be processes whereby the value 
of the dollar would be lowered, and not processes whereby 
the value of the substances involved would be raised. 

D. The Bullion Theory. 

As a sort of antipode to the Fiat Theory of the value 
of monev, we often meet what might be called the Bullion 
Theory. This doctrine, which is more often implied than 
formally stated, teaches that the value of the standard 
metal, say gold, is first determined by the usual forces 
affecting the value of any metal zvithoiit respect to its use 
as money, whereupon, by making such metal the monetary 
standard, the value of money at once becomes equal to the 
value of the metal, as it -a'as before the change, and remains 
at that point, unless causes quite outside those operating 
on monev, change the value of the gold, in which case the 
value of money again adjusts itself to the value of the 
metal gold.* Thus, when in 1896 it was proposed that the 
United States should decree the free coinage of silver, 
thereby making 412.5 grains of silver the standard, — the 
gold price of silver being such that these 412.5 grains of 
silver were worth about 50 cents, — the supporters of the 
bullion theory held that our taking such action woiild 
result in making our dollar worth just 50 cents. 

That this theory is quite untenable is easily shown. The 
adoption of silver as the monetary standard of the United 
States would itself be a cause naturally tending to raise 
the value of silver. How much of an effect it would pro- 
duce, no one could predict. The rise in an ounce of silver 
might be two cents, or five cents, or fifteen, or twenty-five. 

*See page 189. 



PKINCIPI.F.S GOVERNING ITS VALUE 235 

Hut, almost certainl\-, soinc rise would take place ; and of 
course the dollar would go with the new value of 412.5 
grains of silver, wherever it went. The bullion doctrine 
errs in pressing too hard the analogy between a monetary 
standard and a standard for some system of physical men- 
suration. If we should change from a gallon standard con- 
sisting of 8.33 pounds of water to one consisting of 8.33 
pounds of sulphuric acid, we should cut the gallon measure 
in two; because legislative action can not change the bulk 
of 8.33 pounds of sulphuric acid. lUit, if we should change 
our monetary standard from 25.8 grains of gold to 412.5 
grains of silver worth 47 cents in gold, it is not probable 
that we should reduce the value of our dollar to 47 cents 
in gold, for such legislative action could, and almost cer- 
tainly would, change, to some degree, the real value of 
silver. 

PROBLEMS. 

1. "I can not understand what people mean when they 
say that money has risen in value since 1873. Money is by 
common consent the measure of the values of all other 
things ; and, therefore, its own value must be fixed, can not 
rise or fall." From an advocate of gold in the campaign 
of 1896. Explain fallacy. 

2. Suppose that Mr. A., starting with $10,000 capital, 
buys 100,000 bushels of wheat at $1 per bushel, putting up 
his $10,000 as margin. Suppose, again, that after he has 
made the purchase the stock of money is suddenly inflated 
with the result that prices rise ten per cent, all along the 
line, whereupon Mr. A. sells his wheat. 

a. What is his nominal profit in amount? in rate?i' '' 

b. Does he make any real profit, i. e.. has he any 
greater command over goods than before? If so, how 
much ? Explain. 

3. In 1873 the market price of standard gold in the 



236 CHAPTERS ON MONEY 

United States was about $21 per ounce. By 1896, its value 
had risen 40 or 50 per cent., yet its price was only $18.60. 
How could this be? 

4. '"I don't see how we have so much discussion about 
the value of money. Under a system like ours, it is simply 
a question of the value of 25.8 grains of gold." How do 
you answer this? 

5. "The Bank of England is required to buy. and does 
buy, all the gold brought to it at 3£ 17s lo^^d.* As long 
as this is the case it seems impossible that the price of the 
metal should ever fall materially below that minimum or 
that any considerable depreciation in its zulne shonid take 
place." Paraphrase of Fullarton from Carlile's Evolution 
of Modern Money. Point out the error in the italicized 
clause. 

6. "It is entirely wrong for the government to fix the 
price of gold. Of course it must determine what amount 
of gold is to be put into a standard coin ; but it has no 
more business to fix by law the price of gold than to fix 
by law the price of wheat or cotton or anything else." Ex- 
plain the mistake. 

7. "We don't have free coinage of silver subsidiary 
money ; for if we did, private individuals would take 40 
cents worth of silver to the mint and get it turned into a 
dollar's worth of money, thus making big profits at public 
expense." Criticise. 

8. From a report of the Michigan State Grange in 
J894. "This increase (in the value of gold) has amounted 
to an average of 20 per cent, over all other products of 
industry during the past year ..." 

Look up the index number for those two years, and 
find out just what change in the price level took place. How 
do you suppose any one got the idea that there was a 20 
per cent, change? 



* At present, certainly, the price is £3 17s pd. 



PRiNci]'i.i:s (■.()\i:rxi.\c, its vai.l'i; 237 

9. "it is utterl}- impossible that silver should long re- 
main at fifty-five cents an ounce, when three or four of the 
biji^gest mines can ])ro(hice it at a cost under thirty cents; 
for, as everybody knows, the price of anything is, in the 
long run, the same as the cost of producing it." Is that 
sound ? 

10. Argument against silver in the campaign of i8()6, 
when the metal in a silver dollar was worth not far from 
50 cents. "I can see how free coinage is going to increase 
the profits of the mine owners b\- (louhliiisj; the value of 
silver ; but 1 do not see how it is going to help the rest of 
us." (i) In what sense would free coinage probablv have 
doubled the value of silver? (2) Would that result have 
increased the profits of silver mine owners ? 

11. Show by citations from John Stuart Mills' Prin- 
ciples that he can not properly be quoted as an unqualified, 
supporter of the Ouantitv theory. See Book 3, Chapter 
VIII. 

12. "The value of monev, like the value of anvthine: 
else, is a question of demand and supply — the money work 
to be done and the quantity of money to do it." Is the 
phrase after the dash the equivalent of "demand and sup- 
ply?" 

13. Many persons favored the Bland- Allison act of 
1878. which provided for the issue of at least $2,000,000 
worth of silver in the form of dollars each month, because 
they desired to make money less valuable. Yet, at the 
same time, they intended to keep the silver at par with 
gold. Was it reasonable to expect that money would be- 
come less valuable? Explain. 

14. Extract from a speech in the campaign of 1896: 
"If any man in this community would ofifer to buy all the 
eggs at 25 cents a dozen, and was able to make good the 
ofifer, nobody would sell eggs for less, no matter what the 
cost of production, whether one cent or five cents a dozen. 
So with silver. Free coinage would establish the market 




238 CHAPTERS ON MONEY 

price of silver at $1.29, and nobody would sell for a cent 
less." This was seemingly intended to prove that the free 
coinage of silver would not lower our standard. Explain 
fallacy. 

15. Give some reasons, other than the increased output 
/ of gold, why the present ( 1906) level of prices should be 

higher than that of 1896. 

16. Make a table giving the Economist prices from 
1890 to 1896 in one column and the annual production of 
gold for the same years in a second column. Comment on 
their apparent relations. 

17. Why should the Quantity principle have been more 
significant in the United States between 1865 and 1879 than 
it is at the present time? 

18. Show by a red net io ad absurdiim the impossibility 
of the Fiat theory as applied to irredeemable paper. 



/r 



^^- 



yciy^^' 



CHAPTER VII. 

THE REQUISITES OF A GOOD MONETARY STAN- 
DARD. 

We have already in various conueotions commented 
on the importance to a monetary system of a good standard 
firml\- maintained. We come now to consider what are 
the requisites of such a standard. What ideal should we 
set before ourselves in choosing a standard? Our dis- 
cussion of this matter will be general in character, though, 
in the process of illustrating principles, we shall incidentally 
bring out the merits or defects of particular candidates for 
the position of monetary standard, such as gold, silver, and 
bimetallism. I hardly need add that we must not expect 
any actual standard to realize the ideal. This, however, 
does not make the discussion of the ideal useless ; for such 
a discussion furnishes us criteria to be used in deciding 
what is best among various proposed standards. 

Whenever a nation sets out to consider the desirableness 
or undesirableness of adopting a particular monetary stan- 
dard, it is bound to consider the claims of that standard 
from two standpoints ; viz., (_i ) the f^rocess of its intro- 
duction and (2) its actual zvoFliing after being introduced. 
These two points of view will furnish the principal divisions 
of our treatment of the subject. 

I. THE R HOUTSITKS OF" A GOOD STANDARD VIEWED AS ONE TO 

BE INTRODUCED. 

From the first standpoint, a good standard will be (a) 
atjainable and (b) attainable at a reasonable cost to society. 
That no standard can, from this point of view, be called 
good unless it is attainable, would seem too evident to need 



240 CHAPTERS ON MONEY 

even statement, much less emphasis. But the fact is that 
a great many people who would not deny the truth of the 
statement when formally presented, after all. constantly 
overlook it in advocating" their schemes of reform. For 
they talk and act as if nothing more were needed to con- 
vince mankind that a particular standard was the only one 
deserving the approval of reasonable men, than to show 
that, supposing it once established and able to maintain its 
position, it would be just to all classes and would con- 
tribute in a high degree to commercial prosperity. The 
fact that the particular standard in question is evidentlv 
quite impracticable, — quite unable to gain the popular sup- 
port necessary for its adoption, or to keep its position after 
having been adopted, — this weighs nothing with many re- 
formers. It is. therefore, necessary to emphasize attain- 
ableness — p racticability — as a prime requisite of a gooH 
staii^aFd. ' 

Practicabili ty, in the case of a monetary standard, is of 
two sorts, political, aiicF economic. A reasonable scheme 
must be practicable or attainable, in the sense that those 
whose will must determine action can be induced to favor 
it. If it is national, the voters must consent ; if international, 
the treaty-making powers must consent. Only schemes 
which can gain this needed consent are politically prac- 
ticable. But it is equally necessary that a project be eco- 
nomically practicable ; that is, practicable in the sense that 
it will not be shut out or overthrown by the working of the 
natural laws of economics after it has been legally author- 
ized. 

When we come to ask what schemes are, and what are 
not, politically practicable, we find it difificult to lay down 
general principles having any considerable utility. But we 
note one or two considerations which are more or less 
helpful. First, we may at once set down as_[mpracticable 
any scheme which is extraordinarily novel, ingenious, com- 
plicated. The masses of sober-minded men can not be 



REQUISITES OF GOOD STANDARD 241 

brought to favor a project like symmetallism/^ which would 
make the standard consist of both gold and silver joined 
in one coin. It promises well theoretically ; but it is quite 
too fantastic. Similarly, the multiple standard can never 
gain general support. It attracts the theorist, the faddist, 
the college professor, perhaps ; but most practical people 
will have none of it. 

A second characteristic which almost certain!}- proves 
the Tnipracticabilit}' of any scheme with respect to the 
standa rd, is t liat it requires international action. Most 
nations are bound to look on the determination of the 
standard as too vital, and, so to speak, too personal, a mat- 
ter, to be arranged by concert with other nations. Every 
effort to brino; about a union more inclusive than three or 
four neighboring states, closely connected in language and 
commerce, has proved futile, has found each jealous of any 
scheme which involved binding it to act with others in 
this matter. This consideration alone is almost sufficient 
to justify us in ignoring the scheme of international bimet- 
allism, so much advocated a few years since. 

When it comes to economic practicability, it is easy to 
reach definite conclusions on particular schemes, though not 
easy to lay down principles. Generalh- speaking, schemes 
are economically impracticable because they fail sufficientlv- 
to^take iniu accoim t natural laws. Let us consider one or 
two special cases. It is the substantially unanimous opinion 
of specialists that bimetallism limited to a single country 
— national bimetallism — is economically impracticable. 
Doubtless the legal conditions of bimetallism can be main- 
tained — the two metals can be given the status of free 
coinage and full legal tender — ; but actual bimetallism — 
equality of value between the two kinds of money and their 
concurrent circulation— is out of the question. 

*See page 42. 



242 CHAPTERS ON MONEY 

In the first place, equality of value can not be main- 
tained. The argument runs as follows. Equality in value 
between the_gokl bullion in a dollar and the silver bullion 
iriTa. dolla r could not permanently be maintained, so long 
as there is any considerable market for them outside the 
limits of the single country under consideration. Such 
has been the uniform experience in the past ; and the causes 
at work make such a result inevitable. The two metals are 
subject to ditTerent conditions as respects the demand for 
them in the arts, the amount used as money, the costs of 
production, and so on. Their value ratio is almost never 
the same, two months in succession. It is, therefore, 
impossible to maintain equality of value between the 
bullion in a silver dollar and the bullion in a gold dollar. 
But, if gold and silver dollars are not equal in value as 
bullion, no more will they be as coins ; since, when both 
are freely coined, their coins will show the same value 
ratio as the bullion in those coins. That is, under a bimet- 
allism which is merely national, we can not expect to main- 
tain the equality of the two kinds of coin. 

But, in the second place, if equality of value can not 
be maintained, concurrent circulation can not be main- 
tained. For, when inequality in value arises, the dearer 
money will be displaced as standard money and will go to 
a premium. Principle 6, Chapter \' ; and, having gone to a 
premium, it will disappear from circulation. Principle 7, 
Chapter III. That is, actual bimetallism, — bimetallism 
which involves the equality in value of gold and silver coins, 
and their concurrent circulation, — will have ceased to exist. 

As to whether intcruational bimetallism is or is not 
economically practicable, there is still difference of opinion. 
Perhaps the majority of economists would agree that, pro- 
vided the league of nations going into the scheme were 
large enough and the ratio chosen not too wide of the 
market, the system could be maintained for a considerable 
length of time. The difference in the two cases which ex- 



REQUISITES Ol" COOD STANDAKD 243 

plains ihc anticipated dit^'erence in results, is that, under 
an international bimetallism maintained 1)\' practically all^ 
the c^reat countries, there would be almost no world market 
of silver and gold outside the territory where their ratio 
as nionc} was tixed. Hence, the metal which naturally 
was worth more would have no better place to t^o 
to, and so, would stay in circulation. Whether this 
reasoning; is sound or not could never be settled except bv 
a gigantic experiment, and that, as we have already seen, is 
politically impracticable. The powers which have the de- 
termining of such matters will have none of it. Twenty 
years devoted to agitation, through international confer- 
ences, bimetallic commissions, and diplomatic negotiations, 
have convinced the most sanguine that bimetallism, through 
international action, is impossible. 

But a g(~)(^d standard needs n< it iniK to be attainable, 
b ut also t o be attainal)le at a reasonable cost. The process 
of its introduction ought not to work great injury to societv 
generally or to particular classes of persons. Doubtless 
circumstances can be imagined under which it might be our 
duty to introduce a particular system, even at great cost : 
but the advantage, or even necessity, must be unmistakable. 
At the very least, all must recognize this as a most serious 
objection to a proposed change, that it involves great im- 
mediate injury to some class of persons or even to the 
community as a whole. Accordingly, it was not enough in 
T896, when the proposition to substitute silver for gold 
was before the country, to say that silver would prove just 
as good a standard as gold when once we had established 
it. It was necessary also to show that the process of 
transition would not involve disaster.* 



*This was effectively l^rought out in a cartoon which repre- 
sented a fleet of boats in the Niagara river above the falls with 
some one below the falls inviting the mariners to come over, assur- 
ing them that there was just as good sailing below. Perhaps there 
was ; but how to get there and have anything left to sail, presented 
a serious problem. 



244 CHAPTERS ON MOXEY 

The chief evil to be feared from the introduction of a 
new standard is unmerited loss to one or other of the 
parties to fixed contracts. To avoid this danger, the chief 
requirement is that the new standard sliall be coiitiiiiions in 
rahie with the ohi. For example, if a nation which had a 
silver standard during the years of the fall in that metal, 
changes to gold, it should take an amount of gold suffi- 
ciently small to keep the value of the dollar as small as it 
was at the time of the change. On the other hand, if a 
nation which has had gold during the same period, changes 
to silver, it should take an amount of silver sufificiently large 
to keep the value of the dollar as great as that of the old. 
\\& can not, without gross injustice, pass immediately from 
a dollar which costs tl>e labor of one day, to a dollar 
which costs the labor of two days, nor from one which 
will buy twenty pounds of sugar, to one which will 
buy only ten pounds. A sudden increase in the value of the 
dollar, as measured in its cost, must work unmerited injurv 
to all debtors, all persons with fixed money obligations. 
A sudden fall in the value of the dollar, as measured in 
goods, must work unmerited injury to all creditors and to 
all recipients of fixed incomes. Coasecjuentlys wdien a 
change in standards must be made, care should be taken to 
avoid both these results, llic new should be continuous in 
I'alue with the old. 

Recent monetary changes have brought several oppor- 
tunities for the application of this principle. Thus, a few 
vears since, Russia and Japan gave up their former stand- 
ards, which were paper and silver respectively, and adopted 
the gold standard. In both cases, the old standards had 
fallen in value from 40 to 50 per cent as measured in gold. 
That is, the Russian rouble, which forty years ago meant 
about 80 cents in our money, had come to mean about 50 
cents. So the Japanese yen, which once was worth about 
one dollar in our money, had fallen to about fifty cents. 
Further, both nations had, at one time or another, coined 



RKoiMsiTi;s ()!• coon staxdakd 245 

gold money correspoiuliiig in valne lo the old standard and, 
hence, nmch more valnal)le than the present standard. 
When it was decided to introdnce gold, the (|uestion was, 
Shoidd as mnch gcjld as formerly he pnt into the rouhle 
or yen. so that each should mean just what it did l)etore 
the fall of silver, or should a smaller amount of gold l)e 
used, — just enough to make a rouhle or a ven equal to 
the rouble or ven actuallv in use when the change was 
made? Quite properly, both nations decided to pursue the 
second course. For the other plan would have worked 
great injustice to all debtors, by bringing about a sudden 
and great advance in the value, or cost, of the monetary 
unit: while the alternative chosen wrought no injurv to 
any one. 

An illustration of the opposite case would have been 
furnished by the United States, if the policy advocated bv 
one part\ in 1896 and 1900 had been approved at the polls. 
The dollar would have suddenly dropped in value 40 or 
50 per cent, thereby working very great loss to all persons 
depending on fixed incomes. Only national extremity of 
the direst sort could excuse such a revolution. Of course, 
this is not to say that the introduction of a silver standard 
would have been unfair, provided either that the amount of 
silver in the dollar were increased so as to bring it to par 
with the existing dollar, or that all existing obligations were 
made payable in the old dollar. It is merely the great and 
sudden change in the meaning of the dollar of contracts 
which could not be justified. 

We ought, hardly, to leave this topic without den\ing 
the z'alidity of an exception to this maxim that a new stand- 
ard should be continuous in value with the old. which many 
people consider legitimate. That alleged exception is, that 
a country is justified in changing to a new standard very 
diflferent in value from the old. proznded the old has already 
experienced an equal change in the opposite direction. Such 
an exception is entirely unwaranted. The fact that, 
under the silver standard in Japan, the yen had fallen 



246 CHAPTlvRS ON MONEY 

fifty per cent in value, could not justify changing- to 
a gold standard so adjusted as to double the value of the 
ven. Doubtless creditors had suffered undeservedly from 
the fall of the old yen. But this was a result of the natural 
working of the system, for which no one could be justly 
blamed. Further, they had entered into their various con- 
tracts with full knowledge of this possibility. They had 
loaned yens fixed in value by silver, in exchange for the 
right to receive yens fixed in value by silver. They could 
not fairly claim compensation in a new sort of yen. It is 
a part of the natural order of things that the desirableness 
of a given contract to either of the parties thereto will alter 
with altered circumstances. When a capitalist lent five 
liundred yen in exchange for a promise of the borrower 
to pay back five hundred yen four years later, he entered 
a relation which might work for him unexpected gain or 
iniexpected loss, /// the perfectly natural zcorkiiig of things. 
lUit he knew this at the time, and took the chances. He 
must in fairness abide by the consequences. 

Obviously, the case is no different when the monetary 
unit rises in value, that is, when prices fall. Tf, in the 
natural working of the gold standard, the dollar had, dur- 
ing a period of twenty-five years, doubled in value, this 
would not have justified the introduction of a new standard 
applicable to existing contracts which would have instantly 
cut the dollar in two. Probably the fall in prices had 
worked some hardship to debtors, though, because of its 
slowness, much less than is often supposed. But, whether 
involving: small or 8:reat loss, this is one of the unavoidable 
risks of money contracts. The debtor enters into the agree- 
ment, knowing this possibility. Doubtless this particular 
risk should be reduced as low as possible by the choice of 
the best standard before the contract is made. But, after 
the engagement is entered into, there is no choice for an 
honest man but to abide by the results. Accordingly, the 
contention of some advocates of silver in 1896, that the 
proposed change from a one hundred-cent to a fifty-cent 



REQUISITES OE GOOD STANDARD 247 

dollar* was justified, as being a fair offset to the change 
which in fact had taken place from a one hundred to a two 
hundred-cent dollar, f was wholly fallacious. As will be 
pointed out a few pages later, the off'set would not in any 
case have been a fair one, since the iujury to creditors from 
an instantaneous lowering of the standard would be far 
greater than the injury to debtors from an equal change in 
the opposite direction spread over many years. But. whether 
a fair offset or not, the change could not be justified at all 
on such grounds. The doubling of the value of the dollar, 
— supposing that there had been such a change, — had taken 
place in the natural -working of things. It was, therefore, 
a contingency necessarily involved in the making of money 
contracts. Consequently, this . possible modification of the 
terms of his contract was consented to in advance by the 
debtor himself. In contrast, the proposed cutting of the 
dollar in two would be a purely artificial process, which, 
therefore, could not have been anticipated by either party 
and, so, could not have been consented to in the making 
of the contract. Consequently, the change would be an 
alteration of the terms of the contract to the disadvantage 
of one of the parties zi'ithont his consent. 

Finally, the coundness of this contention would be in 
no wise impaired, were we to concede the claims of many 
opponents of gold that the adoption of the gold standard 
was the work of a small band of conspirators, outwitting 
their fellow citizens. For it would still be true that, what- 
ever had been done by a small band of conspirators, cred- 
itors, as a class, and debtors, as a class, had entered into 
existing engagements in good faith and with full knowledge 
of their meaning. In consequence, any alteration of the 
terms of those engagements without the consent of both 
parties thereto, would have been entirely without justifica- 
tion. 



*Measured in gold at the value it had in 1896. 
tAs measured in gold at the value it had in 1873. 



248 CHAPTERS ON MONEY 

11. THE RE OUISITEJS OF A GOOD STANDARD VIEWED AS AlyREAD Y 

IN OPERATION. 

We have noted the requisites of a good standard from 
the point of view of its introduction. We nutst now con- 
sider what is needed to insure its working well after intro- 
duction. 

A. Sf abilitY^ 

From this standpoint, the first requisite to be mentioned 
is stability. A really good standard will be relatively _easy^ 
to niaiiifaiii. As has so often been pointed out, the very 
nature of the monetary standard makes its maintenance 
highly important. W^e can not afiford to have the founda- 
tion of our monetary system suddenly torn out and another 
substituted. All society is permeated with a network of 
obligations between persons which run in terms of money. 
Having an unstable standard means having a state of 
things such that a new and unexpected meaning may be 
given these obligations at almost any moment. Such 
uncertainty as to the meaning of contracts must cripple all 
enterprise, hinder the investment of capital, check its influx 
from other countries, and generally paralyze industry. 
Now, in a degree, all standards are unstable. They must 
be maintained by conscious effort on somebody's part. But 
the degrees of instability among different standards are 
very various. Some could be maintained only by a mir- 
acle of skill and wisdom. Some need little attention. The 
latter is what we want. 

As to the characteristics which enable a standard to 
"realize this ideal of stability, three are most important, (a) 
The standard should be, as far as possible, the fruit of nat- 
ural evolution and not something highly artificial, origi- 
nating in human ingenuity, (b) In so far as the system is- 
artificial, it should depend on national, rather than inter- 
national, action. (c) In case of change, the new system 
should have substantially universal approval. 



REOUISITKS OF GOOD STANDARD 249 

These statements scarcely need comment. An v system 
whic h is a growth, the pro duct of cvohilion, tends to stand, 
is in fact hard to overtlirow, just because it has behind it 
the pcnnaiiciit, abiding:;, forces. — a claim which is proved by 
the fact that it has been evolved. (Jn the other hand, the 
system which results from the special efforts of men con- 
tending against natural tendencies, is weak, because man's 
conscious ideals, opinions, desires, easily change, and thus 
the forces on which such a system depends, change. Again, 
there can be no doubt as to the desirableness of depending 
on national, rather than international, action. The inherent 
instability of systems which can be maintained only by 
international concert is evident. Nations are free to change 
their minds in dealing with each other ; they are likely to 
have abundant reason to do so ; and, as all experience shows, 
they frequently yield to the temptation. We surely do not 
want a standard built on such shifting sand. This is not to say 
that nations should not agree on a common standard, but, 
only, that the standard should not be one which depends 
for its stability on the agreement. Finall}-. a new system 
sli(nil(l have substantially universal afj'rovai : because one 
introduced at the will of a bare majorit}- is likel) to be 
thrown out at any time b}' the rez'crsal of tlic majority. 

The considerations just advanced weigh much against 
several familiar candidates for the position of standard. 
Thus, the m ultip le_a tanda rd, symmetallism, and even inter- 
national bimeta llism a re all too artificial, too ingenious. 
Again, international bimetallism confessedly depends for 
its maintenance on continued concert of action among jeal- 
ous and often unfriendly powers. For nearly all advocates 
of that system admit that actual bimetallism can be realized 
only by the united action of all the great powers, — that the 
withdrawal from the union of any one of three or four na- 
tions (England, Germany, France, and the United States), 
would probably cause the break-down of the system. In- 
ternational bimetallism, th erefo re, even if practicable, woulcT" 
he very undesirable, l^ecause unstable. 



250 CHAPTERS ON MONEY 

B. Constancy in Ab solute Value. 

The second requisite of a good standard, viewed as al- 
ready in operation, is constancy in absolute value. By this 
is meant that tlx- standard should l)c such that, under its^ 
workmg, all those changes in the amount of goods or ser-_^ 
vices purchasable with a unit of money which are _due to^ 
causes -tcorki>ii^ directly on money .'r the standard itself, are 
shut out. This obviously implies that it is not essential to 
a good standard that it should shut out changes in value 
due to causes not working directly on money or the stand- 
ard. To illustrate concretely, the requirement here set 
forth tells us that money ought not to be suddenly lowered 
in value, i. e.. general prices ought not to be raised, by a 
great inflation of the paper money, as in France during the 
Revolutionary period or in the United States during the 
Civil War ; it does ;;o^ however, forbid a fall in money, i. e., 
a rise in prices, due to the fact that goods generally, not 
including money, have become more difficult to produce. 
In like manner, the principle before us condemns a sud- 
den rise in the value of money, i. e., a fall in general 
prices, brought about by a rapid contraction of the cur- 
rency or the adoption of a new standard much higher 
than the old ; but it does not try to exclude a rise in 
money, i. e., a fall in prices, due to the fact that the real 
cost of producing goods has declined. 

So much for the meaning of the doctrine that a monetary 
standard should be constant in absolute value. What now 
are the grounds on which the maintenance of this doctrine 
rests? Why do we hold that a standard should be constant 
in absolute value? Why, further, that it need not be con- 
stant in merely relative value? We will begin with the 
former question. First, we will take a moment to comment 
on a fallacious argument for the doctrine which often comes 
to the front in popular discussion. Bluntly stated, it is 
this: every rise in money, i. e.. fall in prices, in itself makes 



KICyUlSlTKS OF GOOD STANDARD 25 I 

all owners of property just so much ])oorer; while every 
fall in money, i. e., rise in ])rices, in itself makes every prop- 
erty owner just so much richer. Thoui^h perhaps no one 
would be williuij to defend the doctrine when expressed 
thus Hatly, plenty of peojjle make statements which imply 
their adherence to it. Thus, a few years ago in a public 
discussion a well-educated Michigan editor declared that 
any man who owned a farm five \ears before, which was 
then worth $10,000, if he still owned it, had in the interim 
lost two or three thousand dollars, all because of the gold 
standard ; since, in the general fall of prices due to that 
standard, the price of his farm had declined to $7,000 or 
$8,000. Similarly, a prominent politician declared that, 
simply f!irniii:;h the general fall in prices, every merchant had 
lost forty per cent of his capital, because goods worth $100,- 
000 had come to be worth only $60,000. 

Xow, of course, this was all quite wrong, even if we 
admit the correctness of the statistics. If there had been 
a really universal fall in prices, then, unless a farmer or a 
merchant were in debt, the change in the money value of 
his property would have made no difference in the amount 
of his wealth. ^*\ imiversal fall, or a universal rise, in 
P^rices. /'\' itself, causes neither loss nor gain to any one. 
If certain other conditions are present, it will work im- 
mense harm ; if they are not present, the change in prices 
has no real effect whatever. It is simply a case of changing" 
the unit in which our wealth is measured ; and this, of 
course, accomplishes nothing. Thus, a pile of wheat is 
just as big, when we measure it in bushels and find there 
are fifty bushels, as when we measure it in pecks and find 
there are tw^o hundred. Similarly, a farm will raise just 
as much produce whether it is rated as worth ten thousand 
dollars or eight thousand ; or, if the farmer wishes to sell 
it and use the proceeds to buy another farm or other goods 
of any sort, the new price, eight thousand, will now buy 



252 CHAPTERS ON MONEY 

as r.uich as the old price, ten thousand, would have bought * 
Just so it is with the merchant's stock of goods. Since, by 
hypothesis, the fall of prices is universal, the sixty thous- 
and dollars received for the goods will now go just as far 
in buying new stock, as one hundred thousand would have 
Q-QUQ before the change. There is. therefore, neither loss 
iior gain from a universal fall of i)riccs by itself, i, e., pro- 
I'idcd 110 other coiiditiojis conic into the case. What those 
conditions are will appear as our discussion proceeds. 

We have disposed of a fallacious argument for con- 
stancy of value in money ; let us now go on to consider 
those arguments which will stand examination. Of these, 
the first and most important is the following: changes in 
the value of the standard canse une.vpected changes in the 
significa>icc of all money engagements, and, therefore, in 
effect change the terms of snch engagements, after they have 
been made, and that to an extent to which the parties to 
those engagements can not be supposed to have consented. 
Thus, let us suppose that in i860 Mr. Morris loaned to the 
Portland Cement Company $3,000, payable in four years. 
Now, to Mr. Morris that sum of money had at the time of 
the loan a certain significance in power to secure the neces- 
saries and comforts of life. It would perhaps pay his fam- 
ilv expenses, on the scale of living to which he was accus- 
tomed, for a whole year. Further, in i860 he doubtless 
had no other expectation than that, four years later, this 
sum would have substantially the same power to secure 
goods that it then (in i860) had. But the issue of legal 
tender treasury notes wholly altered the situation. By 1864, 
the dollar had fallen in value more than fifty per cent. In 
consequence, the $3,000 returned to Mr. Morris would buy 
no more than $1,500 would have bought at the time the loan 
was made. In effect, therefore, Mr. Morris received back 



* By hypothesis we are dealing with a fall in the price, not of 
any particular piece of hind or even of land in general, hut of every 
kind of goods. 



KKOL'ISITKS OJ" C.OOD STA.X DAKl) 253 

only half what ho had loaned, and what he understood him- 
self to have loaned. Mere, then, is a g^reat and manifest 
change in the meaning of a contract, without the consent 
of at least one of the parties thereto. 

The above illustration brings out the fact that a change 
in the terms of a ^contract seriously harmful to (me of thej 
part ies, can be brought about In a fall in the value of the 
standard. To make an illustration showing how the terms 
of the contract may be changed by a rise in the value of 
money, we have only to take the case of the merchant, on 
page 251, whose stock was supposed to experience a sud- 
den fall in money value from $100,000 to $60,000, and add 
the hypothesis that he had boiii^ht his stock on credit. In 
that case, he would obviously lose $40,000, since his debt 
expressed in money would still be $100,000, though the pro- 
ceeds in money of the sale of his goods w'ould be onlv 
$60,000. 

On this point,- — the effect of changes in the value of the 
standard on money engagements, — I have chosen illustra- 
tions from the relations of debtor and creditor. It, perhaps, 
ought to be added that the reasoning applies just as well to 
other money engagements. Every general fall in the value X 
of money must diminish the v alue of salaries, fees, annni- j 
ties, and, i n short, of all claim <^ tn rgr^zVjg-mn ney. ( )n the / 
other hand. cver\ rise in l]i£_i:alue of money-Js likely to/ 
increase the burden of salary-i)ayers, fee-pa\ers, annuity I 
comp anie^s, a nd, in short, of every on e on whom rests an J 
ciblioation to fay mone>'. 

In the argument just given for keeping the value of the! 
standard constant, namely, that, only so. can we avoid 
changes in the terms of money engagements after those en- 
gagements have been entered into, we doubtless have the 
most w'eijjhtv reason for insisting that the standard shall 
be possessed of this characteristic. But other reasons ought 
not to be overlooked. Constancy in the value of the stand- 
ard is important, in the second place, because among per- 



254 CHAPTERS OX MONF.Y 

sons having- business relations with one another, unmerited 
gains come to some, and undeserved losses to others, even 
though there are no money engagements involved, flirough 
the fact that ji__£hgjj^_c in prices due to causes ac tiiio; o n 
money docs not affect all goods and services in tlij 
same deforce. Thus, if the monev of a countrv is beine 
so rapidly inflated that it falls in value, this will usually 
show in the prices of goods much sooner than in the 
wages of labor, with the result that wage-earners have 
to pay more for goods though getting no more money 
to pay with, while employers get higher prices though 
not incurring greater costs. This principle, that prices and 
wages change at ditferent rates, has furnished one of tlil 
stock arguments for a standard which slowly falls in value, 
particularly for silver in Mexico, Japan, and India, and for 
bimetallism in Europe. Such a standard, it was said, fur- 
nishes a perpetual stimulus to industry. The manufacturer 
finds his prices rising to correspond to the fall in the stand- 
ard, while the wages he pays remain at the old level, or at 
least rise more slowly than the prices, thus, giving him a 
bonus in the shape of extra profits. It hardly need be 
pointed out that this is not exactly the sort of argument to 
address to laborers. Surely it is fairer to have a standard 
which neither falls nor rises, and, therefore, hurts neither 
laborer nor employer. 

A third reason for demanding constancy of value in a 
monetarv standard is to be found in the fact that such con- 
stancy, of value is needed to keep industry in general in 
a reasonably healthy condition, — to weaken, at least, that 
tendency which industry shows to alternate between per- 
iods of excessive trading and periods of industrial stag- 
nation. At present, doubtless, this tendency can not be 
eliminated ; but, in so far as abatement is possible, it surely 
ought to be realized. But all agree that a rap idly falling- 
standard aggravates the overtrading movement, while a rap- 



REOUISlTi;S OF GOOD STANDARD 255 

icily rising stim dcjTcl aj;".iiravates the reaction. These condi- 
tions, therefore, ought, as far as possible, to be shut out. 

1 have explained why a standard ought to have con- 
stancy in absolute value. 1 must next give the most weighty 
reasons for holding that constancy in relative value is not 
necessar}- ; or, in other words, why we are not required to 
shut out changes in the purchasing power of money due to 
causes not acting directly on money or the standard. To 
illustrate, in 1861 a civil war broke out in the United States 
which largely shut off the world's chief source of supply 
for two articles of much significance in the world's market, 
cotton and tobacco. In consequence, between 1861 and 
1864 the English (gold) prices of these articles rose from 
three to five hundred per cent ; and, although many other 
prices fell slightly, the general result was an average rise in 
English prices of about thirty-eight per cent. Now, the doc- 
trine here supported declares that, in the case described, it 
was not reasonable to insist that the old level of prices should 
be maintained, — not reasonable to insist that, if need be, the 
money stock of England should be contracted until prices 
had fallen back thirty-eight per cent. In fact, the sound 
doctrine goes even further and declares not only that the 
action proposed is not required, but also that it is forbidden 
by both justice and expediency. 

The general argument in support of this position can 
be stated in a sentence. Undertaking to shut out changes 
in the value of money which are not due to causes acting 
on money is illegitimate, because changes of the sort con- 
sidered work no harm, or an amount of harm which is at 
least no greater, usually less, than the harm which would 
result from an attempt to shut out those changes. Let us 
see how this statement is justified, in two or three of the 
most important cases. 

First, take the case of a change in the level of prices 
due to a great change in the output of some one or two 



256 CHAPTERS ON MONEY 

commodities, whether this change be a falHng off or an in- 
crease. Thus, what about the case of the sudden advance in cot- 
ton and tobacco mentioned above? Doubtless, the change 
worked some harm. Consumers generally had to pay more 
money for cotton and tobacco though their incomes were no 
larger than before. But what would have been the result of 
bringing the average of prices back to the old level by lower- 
ing all prices 38 per cent? Doubtless, consumers generally 
would have been pleased to buy cotton and tobacco 38 per 
cent cheaper. But, then, look at the other side. First, their 
own eoods from which thev got the monev to buv cotton and 
tobacco would have been 38 per cent cheaper, — making pret- 
ty nearly a stand-off. But, secondly, if they employed any 
quantity of borrowed capital, — as is most common. — the 38 
per cent fall in the prices of their products would not have 
been accompanied by any corresponding fall in their money 
obligations. They would still have had to pay 100 cents on 
the dollar, although receiving for their goods only 62 cents 
on the dollar. Thus, the plan of arbitrarily lowering all 
other eoods in order to neutralize the rise of cotton and 
tobacco, while of little advantage to people generally, would 
have worked positive and great harm to most producers 
who employed borrowed capital. 

A second case of change in the general price level not 
due to causes operating on money is to be found in th^ 
rapid and steady rise which characterizes a period of recov- 
ery in business, continuing till the climax of industrial ac- 
tivity is reached, and the rapid fall which marks the period 
of reaction. As already explained in another connection, 
the chief cause of these phenomena is a change in credit 
and"bushiess confidence. As long as these are increasing, 
demand is constantly overtopping supply and so raising 
prices ; when these decline, supply overtops demand and so 
depresses prices. Can we reasonably insist on having a 
monetary standard which eliminates phenomena of this sort ? 
Surely not. 



REQUISITES OF GOOD STANDAEiD 257 

First, the result soiii^ht is, to say the least, of doubtful 
advantage. The early rise and the later decline in prices 
are perfectly natural phenomena, expressing the real facts 
of value as determined by demand. As a physician would 
say, the\- are physiological, rather than pathological, phe- 
nomena. The presumption surely is that, being perfectly 
natural, they have some part to play in industrial life and 
should be let alone. But, not to dwell on this point, it is 
enough to say that, whether desirable or not, the scheme is 
quite iin [practicable. It is impossible to find a standard, hav- 
ing any chance of adoption, which will keep prices from 
rising during a boom and declining when reaction sets in. 
Gold, silver, bimetallism, — all of these have been tried and 
have failed. The only system which pretends to be able 
to do the work is what we have called the Multiple Com- 
modity standard, that is, a system in which only paper mon- 
ey would be used, — the value of that money, as measured 
in commodities, being kept constant by artificial regulation. 
But that system, as so often remarked, has no chance of 
adoption, even were it desirable. The majority of ordinary 
voters will say that it is too fantastic; it would cut us 
apart from other nations ; it would give too much chance 
for manipulating the currency in the interests of special 
classes ; and so on. On the other hand, if it really promised 
complete success, it is hard to believe that many of those 
who have thus far advocated it would continue their sup- 
port. They want it, seemingly, because they expect it to 
shut out the decline in prices which marks the reaction. 
Were they convinced that it would be worked so as to shut 
out also the rise in prices which belongs to a boom, they 
would almost certainly oppose it. 

But, by all odds, the most important case of a change 
in the price level not due to causes working through money, 
is that of changes due to alterations in the real cost of pro- 
ducing goods. Such changes, a really good standard is 
not called on to shut out ; because if real costs are in- 



258 CHAPTERS ON MONEY 

creasing, it is Icc^itimate for prices to rise, that is, for the 
value of money to fall, and if real costs are diminishing, 
it is quite legitimate for prices to fall, that is, for the value 
of money to «ies. Mi^e. • 

Let us take the first case. Suppose that because of a 
decline in industrial efficiency, as in the western world after 
the fall of Rome, the production of all classes of goods 
should rapidly become much more costly, as measured in 
real sacrifices, than it had hitherto been. Could creditors, 
annuitants, and other claimants under money contracts, rea- 
sonably insist that something should be done to hinder the 
rise in prices natural under such conditions? Could they 
reasonably claim the right to receive just as much in goods 
as they would have received but for the industrial change? 
Very doubtful, to say the least. By hypothesis the change 
in conditions is general — every one nnist be satisfied with 
smaller returns for his exertions. The creditor or the 
annuitant can not reasonably demand that his case be made 
an exception. Further, the hardship involved will be less 
than seems at first sight. Since all productive capacity has 
declined, every man has been compelled to readjust his scale 
of living, to be content with satisfying fewer wants and less 
completely satisfying those. Accordingly, the smaller 
amount of goods which the creditor can now get for his 
money will perhaps bear just as large a ratio to his total 
consumption as the larger amount of goods did formerlv. 
It will be no great hardship that the proceeds of his repaid 
loan will no longer buy silks and diamonds ; since he has 
already given up silks and diamonds as a part of his living.* 



* This discussion suggests a modified form of the commodity 
ideal which has a truer claim to absoluteness than the original. It 
is not reasonable to demand that the dollar shall at all times buy 
the same amount of the same kind of goods. We should rather in- 
sist that it have the same relative efficiency in furnishing a liv- 
ing in the same social position. If society has found it necessary to 
put up with a lower standard of living, the purchasing power of 
the dollar ought to fall off accordingly. So, if through increased 
power over nature people have come to live better, the power of 
the dollar ought correspondingly to increase. 



RlvQUlSlTliS Ol" COOI) STANDARD 



259 



P)Ut, if we can not reasonably complain of a rise in g-cn- 
eral prices when this is the result of an increase in costs, 
no more can we reasonably complain of a fall of prices due 
to a (leclin.e in costs. Here we really need to distino-uish 
two sub-cases : ( i ) where the decline in costs affects all 
producers of a commodity to substantially the same ex- 
tent, and (2) where the cost to those producers who are in 
a position to determine prices falls, but the cost to other 
producers does not fall. The first of these cases would be 
illustrated by the introduction into farming- of machinerv 
which helps almost all farmers ; the second, bv improve- 
ments in transportation which bring remote farms nearer 
the market, but do not help near-by producers. 

Now, in the first case, it is quite clear that the debtor 
producer can not properly insist that something shall be 
done with the monetary system in order to stop the fall in 
prices ; since the fall icorks jio harm to him. To make this 
clear, we need only analyze carefully the process by which 
a debtor suffers from falling prices. It is simply this. As a 
producer of some particular commodity, the delDtor uses his 
credit to cover the costs of production, those costs being 
such as to require the continued maintenance of present 
prices to cover them. Having done this and having brought 
his goods to market, he finds that the price of those goods 
has fallen, and that, consequently, the proceeds will no 
longer cover costs, and, therefore, will not pay the debt in- 
curred in producing the goods. Such are the conditions 
necessary to make a fall in prices really harmful to debtors. 
P.ut. these conditions plainly are not present in the case 
considered in this paragraph. The fall of prices here in- 
volved, is one due to the fact that the cost of producing 
goods has declined to substantially all producers. Here 
surely there can be no chance for loss. It is true that, as 
before, the producer has gone in debt for the costs. Further, 
there has been a fall in price since the productive process 
was started. But by hypothesis that fall in price was caused 



26o CHAPTEIiS ON MONEY 

bv, and so subsequent to, a decline in tbe costs of produc- 
tion. Consequently, the new selling price is adequate to 
cover the costs, and the proceeds of the sale will cancel the 
indebtedness incurred in production. That is, a fall in prices 
due to a decline of costs common to all producers of any 
commodity, works no harm to debtor producers. 

So much for the first case. What now shall we say 
about the second, where the cost to those producers who 
are in a position to determine prices has fallen, but not the 
cost to other producers? When, for example, the fall in 
ocean freights made it possible for the wheat of Australia 
to undersell in the markets of England the more costly por- 
tion of the home-grown product, the cost of producing 
wheat for the English market declined to the growers of 
Australia but not to those of England. In such a case, ob- 
viously, we can not say that no debtor producers suffer harm, 
from the fall in the price of wheat. Some do ; some do not. 
Can those who do lose, reasonably insist that we so adjust 
the monetary system, as to keep general prices constant and, 
so, hinder the particular prices in which these persons are 
interested from falling ?* I think not ; and for two reasons. 
( I ) Such action would necessarily work undeserved harm 
to many other members of the community in no way re- 
sponsible for the change; and, between permitting an injury 
which is brought by natural causes upon one class of per- 
sons and consciously causing an injury to another class of 
persons in order to save the former, the decision of society 
must, generally speaking, be in favor of the former alter- 
native. (2) The action proposed would hinder that pro- 
cess of rcadjustnicnt in economic matters which changed 
conditions have made necessary and which the fall in prices 
will naturally bring about. 

The first reason surelv needs little elaboration. It cer- 



* Would keeping general prices constant be sufficient to keep 
the particular prices in question from falling? 



RI'OUlSlTlCS OF C.OOl) SIAXDAKI) 261 

tainly can not be doubted that an artificial inflation of 
prices, adequate to restore tlie ])articular o-oods involved to 
their old level, would work much injury to all creditors and. 
in general, to all persons dependent on fixed, or substantiallv 
fixed. incomes. Nor is there greater doubt with respect to 
the rest of the argument, viz.. that society can not properly 
attempt to correct evils of natural origin by anv procedure 
whicli in\(il\-cs creating artificial evils of C(|ual magnitude. 
\\'e have no right to rob Peter in order to restore to Paul 
what nature has taken from him. Paul's loss is. in the old- 
fashioned phraseology, a dispensation of Providence. We 
were not responsible for its happening, and can not justlv 
be called to account for not finding a remedy. But, if we 
rob Peter to make Paul good, we shall certainly be respon- 
sible for his loss. and. hence can properly be condemned. 

The second reason for non-interference in the case be- 
fore us requires somewhat fuller treatment. To manipulate 
the monetary system so as to keep up prices artificially 
"would hinder that process of readjustment in economic 
matters which changed conditions have made necessary, and 
which the fall in prices will naturally bring about." Tha^- 
some readjustment haj's been made necessary. — that the 
English producers who can no longer compete with their 
Australian rivals have been put into an abnormal position. 
— this is surely evident. The lowering of transportation 
costs has brought into competition with them, new lands on 
which the cost of production is so low that the old lands 
can not go on producing wheat at the old cost, and still pay 
the old rent or earn the old profit. Perhaps, if their rent 
should be lowered, they would be able still to raise wheat 
profitably. But it may be that, even with all rent taken ofif, 
there is no profit in this crop. Quite likely the only right 
course, in such a case, is to give up wheat raising altogether, 
and devote the land to some product more valuable than 
wheat, which more valuable product the improvements in 
transportation have enabled the farmers in question to mar- 



262 CHAPTERS ON MONEY 

ket in some great city hitherto too far away.* But, however 
that may be, some rcadjnstuicnt is certainly necessary. 

But, not only have the old producers been put into an 
abnormal position requiring- readjustment, the natural 
means for bringing about tliis necessary readjustment is a 
fall in prices. It is like the red flag which tells us that 
danger lies ahead ; it is the signal which directs the pro- 
ducer to make the changes which altered conditions have 
rendered necessary, to try another crop, to remove to other 
lands, or to do whatever the circumstances demand. Fur- 
ther, the very loss in profits which the fall in price causes, is 
the spur which driz'es the producers to make these changes. 
Conceal the real conditions, by an artificial raising of prices 
- — remove the motive which would cause the producer to 
change, by lessening the loss which quite properly follows 
as the penalty of continuing to do a foolish thing ; and you 
really work harm to the producer himself, as well as to 
every one else. For you postpone so much longer that 
process of readjustment which alone can bring equilibrium. 

I hardly need add that, in insisting on the propriety of 
letting prices fall under the conditions in question, I do not 
intend to deny that this means some hardship to the group 
of producers immediately interested. Plainly, they can not 
effect the necessary readjustment without some loss. But, 
then, this is characteristic of all industrial life ; every change^, 
even every improvement, means loss to some one in the re- 
adjustrnent . The power loom brought undeserved suffer- 
ing to many weavers ; the railways put the stage coach out 
of commission ; pipe lines ruined many teamsters of the 
oil regions ; and so on. But these chances are discounted 
by those who go into any business or profession. The in- 
vestor in mines makes allowance for the fact that explosions 
and fires are likely to cause him great and unexpected loss- 



* Thus it may be that their proper course is to raise smal! 
fruits or sarden stuff. 



REQUISITES OE GOOD STANDARD 263 

es : the water-transportation companies allow for the losses 
by storm : and so on in every industry. Year in and year 
out, farmino^. niinin";, commerce and manufacturins:^ must 
pay, — everything- being taken into account, — each about as 
well as every other ; since otherwise the unprofitable ones 
would l)e deserted. It is reasonable to insist that each par- 
ticular industry, when its bad turn comes, shall, generally 
speaking, bear its own burdens, — that it shall not try to 
shift them to some other class or to society generally, by 
making fundamental changes in the monetary system. 

The principle we have just been discussing was of con- 
siderable importance, in connection with the heated contro- 
versy over the gold standard which occupied the last quar- 
ter of the nineteenth century. In the course of the contro- 
versy, it came to be generally admitted, even by the sup- 
porters of gold, that between 1875 and 1895 ^ considerable 
fall in general prices had taken place. But the question 
still remained; what was the cause of this fall? The oppo- 
nents of gold answered that it was due to the increasing 
scarcity of gold. In that case, the fall was a real hardship 
to producers generally, and called for at least an honest at- 
tempt to find a remedy. The friends of gold, on the other 
hand, quite generally held that the fall in prices was rather 
to be charged to the increased use of steam, to improve- 
ments in machinery, to cheapened transportation, in short, 
to diminished cost of production. If they were right, the 
change in question could not properly be urged as an ob- 
jection to the gold standard, according to the view which 
has just been set forth. 

In the preceding discussion, T have tried to show that we. 
canreasonably demand that a standard shall show constancy 
of value, only in the sense that it be free from such 
changes as are due to causes acting on it directly, or on 
mon e\ ■ I nmst not leave the topic without remarking that 
it is possible, and indeed not uncommon, to exaggerate the 



264 CHAPTERS ON MONEY 

importance of constancy of value even in this sense. Not 
a few men, at once very able and very learned, have in- 
dulged in anticipations with respect to the dreadful con- 
sequences to be expected from a continuously falling, or a 
continuously rising, standard which it is not unfair to char- 
acterize as hysterical or even ridiculous. The fall of Rome 
has been seriously attributed to a fall in prices caused 
by the scarcity of the precious metals. The industries of 
the western world during the last quarter of the nineteenth 
century have been likened to a stag in the embrace of a 
boa-constrictor which was slowly but surely squeezing the 
noble beast to death.''' Now, this is, of course, inex- 
pressibly silly. As a matter of fact, the progress of the 
world's industries during the period in question was almost 
literally unparalleled. All such talk rested upon a gross 
exaggeration of the importance of constancy of value in 
a monetary standard. Doubtless this characteristic is 
desirable and important. But, then, perfection is not to be 
looked for in any social institution. Some degree and kind 
of variability in the standard is entirely consistent with high 
industrial prosperity and substantial justice to all classes. 
In a word, it is necessary to append to our doctrine that 
constancy of value is vital to a good standard, some decided 
qualifications. Let me now suggest the most imoortant of 
these. 

First, it should be noted that or/o'tt'^ gradual, changes in 
the real value of money, i. e., the level of prices, do not 
constitute a serious defect in the standard. Changes must 
be -rapid enougli" so that a notable price fluctuation is 
effected within the lifetime of contracts ; for, only on that 
condition, can they modify in any notable degree the signifi- 



*Listen to this from an eminent professor of Political Economy, 
speaking at the Monetary Conference held at Brussels in 1892 : 
''that baneful, blighting, deadly fall of prices which for nearly 
thirty years has infected with miasma the economic life-blood of 
the whole world." 



REQUISITES OF GOOD STANDARD 265 

cance, or the burden, of those contracts, and so work hard- 
ship to one or the other of the contracting- parties. Thus, 
creditors, wage-earners, and salaried persons object to 
rising prices, because thereby the real power of their in- 
comes to satisfy their wants is diminished. But. if the con- 
tract covers only a year and during that time prices rise 
only two or three per cent, a creditor or a salaried person 
must be rather unreasonable to find serious fault with the 
standard. Advances in price which have their origin quite 
outside the monetary system, and which amount to ten, 
twenty, and even fifty per cent, frequently take place in 
the chief articles of consumption such as meat, fiour, and 
butter. These advances every one recognizes as natural 
and unavoidable. Such being the case, to grow hysterical 
because of a two or three per cent advance in general 
prices having its origin in monetary conditions, seems little 
short of ridiculous. 

"But," the reader may object, "all contracts are not for 
so short a time as three to six months." True: mortgage 
indebtedness averages about four and a half years ; and 
manifestly a given change in prices will modify such con- 
tracts much more than those of ordinary mercantile life. 
Nevertheless, the principle applies to this, as well as to 
the preceding, case. A fall in the level of general prices, 
in order to be significant, even to the mortgage debtor, 
must be fairly rapid. Otherwise, it is likely to be 
trifling, when compared zcith the natural fluctuations 
in the price of the particular commodity upon which the 
debtor relies to pay off his mortgage. To illustrate, take 
the case of wheat, which in many parts of the United 
States is the chief dependence of the farmer for his money 
income. As a slight investigation of price statistics will 
show us, wheat prices fluctuate far more widely than, and 
quite independently of, general prices. Thus between 1884 
and 1888, though general prices fell almost exactly five per 
cent, — wheat rose forty-three per cent. So between 1893 



266 CHAPTERS ON MONEY 

and 1897, though general prices feh ten per cent, wheat 
rose fifty per cent. On the other hand, between 1879 and 
1883 general prices rose about ten per cent, while wheat 
fell seventeen per cent. In these cases, general prices and 
wheat prices moved in opposite directions. Sometimes they 
move in the same direction ; but, wheat, of course, goes 
much faster than goods generally. Thus, between 1891 and 
1896, there was a fall in prices of about ten per cent, while 
wheat fell about forty per cent. 

Now. all this goes to show that it is unreasonable for 
the farmer to complain of small fluctuations in the level of 
general prices, or to insist on maintaining that level abso- 
lutely constant. Thus, when the price of wheat rose forty- 
three per cent, though general prices had fallen five per 
cent, the debtor farmer found his burden much lightened, 
in spite of the fall in prices. To have restored the former 
level of prices by manipulating the currency, would have 
favored unduly one already much favored by fortune. On 
the other hand, to have insisted on returning to the former 
level in the case when general prices had risen ten per cent 
while wheat had fallen seventeen. — to have contracted the 
currency so as to cut down the ten per cent rise and thereby 
to have increased the fall of wheat to twenty-seven per cent, 
—such a course would have meant the arbitrary increase 
of a burden which fortune had already made too great. 
Surely no one would favor this ; though it is obvious that, 
if we are bound to maintain one constant level of prices, we 
must do so when it hurts the debtor as well as when it 
helps him. 

Let us now make one or two applications of this prin- 
ciple, that changes in the value of the standard must be 
fairly rapid to be of material importance. During the cur- 
rency struggle of 1896, it was common to argue that, be- 
cause the dollar had risen since 1873 to be really worth two 
dollars, it would be only fair to cut that dollar in two by 
going to silver. That is, the proposed change would be, 



Ki;oUl SITES OF GOOD STANDARD 267 

not a resolution, but a restoration. Manifestly such reason- 
ing will not gibe with the doctrine just laid down. If we 
suppose that the dollar had really advanced one hundred 
per cent in value during those twenty-three years in ques- 
tion, — though in fact it had advanced only about two-thirds 
of that amount, — this would not justify a reversal of the pro- 
cess, effected /'/; a day. To throw a man out of a ten-story 
window in revenge for his having hustled you down his 
front steps could hardly be called exact justice. Even if 
money had risen one hundred per cent, i. e., prices had 
fallen fifty per cent, in twenty-three years, this would mean 
a fall of but little over two per cent a year, and, as we 
have just seen, would work comparatively little hardship. 
Compare wath such a process, the lowering of the dollar 
fifty per cent, that is, raising prices one hundred per cent, 
instantly \ Surely it w^ould be hard to conceive anything 
more outrageously unjust. 

But the principle before us not only shows the unreason- 
ableness of a scheme which would instantly cut the dollar in 
two, as a proper ofifset to a doubling of value which had 
occupied twenty-three years, it also shows that the whole 
indictment of the gold standard had little foundation, — 
was based on unreasonable ideals as to the degree of stead- 
iness in value which can fairly be demanded from a stand- 
ard. Between 1873 and 1896, prices had fallen perhaps 
forty per cent, less than tw'o per cent per annum. Now, 
as was remarked a few pages back, there is a fair chance 
of maintaining the contention that this gradual fall of prices 
w-as no more than would follow as a natural and desirable 
consecjuence from a decline in the cost of production, — in 
wdiich case it would not constitute an objection to the gold 
standard. But, even if we admit that the whole fall was 
due to the relative scarcity of gold, it would not prove that 
standard to be seriously defective. For, changes in the 
value of money which occupy so long a period, and show 
so slow a rate, can not form a serious objection to any 



268 CHAPTERS ON MONEY 

Standard. They are of no significance to commercial debt- 
ors, of little significance to farmer debtors,* and of consid- 
erable significance only in the case of a class of debtors 
who can be fully trusted to look after their own interests, 
viz., corporations, public and private, which carry a great 
volume of bonded indebtedness running for periods of 
twenty or thirty years. 

Having said so much for gold, I am disposed to state 
the case almost as strongly for silver. While the latter 
metal is doubtless less steady in value, as measured either 
in commodities or sacrifices, than gold, it is not so un- 
steady as to make in consequence a particularly bad stand- 
ard of value. The great objection to silver is that it is 
not the standard of the leading industrial nations, a fact 
which in our day is of much moment, as will presently 
appear. 

The only standard which from our present point of 
view is really very bad is fiat money, — irredeemable paper. 
At its worst, it is almost intolerable. From 1862 to 1863 
our greenbacks fell twenty-six per cent ; the next year, 
thirty-five per cent ; the next, thirteen per cent. And in the 
course of these years, within intervals of two or three 
months, thev sometimes rose or fell, at rates several times 
faster than any of those named. Such changes work very 
great hardships, and nothing but political necessity of the 
clearest sort can justify a system which makes them possible. 

A second qualification which we nuist put upon the 
demand for steadiness of value in a standard is this ; 
seriously to impair the excellence of a standard, changes in 
value iinist be quite irregular. If money steadily rises, or 
steadilx falls, throughout a series of years at a moderate 
rate, no serious harm will be likely to result. This is due 



*The change in prices which hurt the farmer was not the slight 
fall in general prices, l)ut the great fall in certain partieular prices. 
See page 266. 



REOinSlTl'S OF GOOD STANDARD 269 

to the fact that whatever happens with reguhirity can he 
anticipated, and whatever can be anticipated will be dis- 
counted bv dealers. In the case before us, this means that 
during' a period in which the value of money is rapidly 
falling, the rate of interest is likely to be rising, that is, 
capitalists are recouping themselves for the loss in prin- 
cipal by earning higher interest. On the other hand, when 
money is rising, interest will almost certainly be falling, 
and so the debtor producer will be reimbursed for any loss 
caused by the increase in the principal. 

C. Intcriiatioj iaUtj. 

The third, and in many respects the most important, 
requisite of a good standard is internationality. The ideal 
standard is a world-standard. — ^one universally accepted. 
But, in the absence of any such standard, the most desirable 
is that which most nearly approaches the ideal. Especially, 
should our standard be international in the group of coun- 
tries with which we maintain most intimate commercial 
and banking relations. 

The principal grounds on which such importance is 
attached to having for our standard one which is in gen- 
eral use among the nations are the following. First, a 
common standard insures between the countries maintain- 
ing it, a constant par of c.vchaii;^c. — a matter of much 
slsrniiicance to trade. Sccondh . a common standard dimin- 
ishes the element of risk involved in the international move- 
ment of capital, hence facilitates such movement, in some 
cases renders the burden of a debt easier to bear, and so on. 
Thirdly, a common standard permits the free flow of 
money into and out of the country, and, therefore, permits 
a deficiencv in the stock of standard money to be made 
good bv drawing on the supplies of other countries, and an 
excess to be relieved by export. Finally, a standard in 
general use is far more constant in value than one confined 
to a few nations. 



270 CHAPTERS ON MONEY 

( )f these four reasons for choosing" a standard common 
to the leading nations, the first probably most needs com- 
ment and explanation. Recalling a former discussion, we 
remember that the rate of exchange, i. e., the price of a 
right to claim money in some outside place, ranges between 
limits which are. say, two or three cents above, and two or 
three cents below, a certain middle price, the natural value 
of the money of the other place as measured in our money. 
This middle price, this natural value of the monc_\- of the 
other country, wc call the par of exchange. In the case 
of England, this par is $4.866-|-, because both England and 
America have the gold standard, and the English unit con- 
tains 4.866-I- times as much fine gold as the American.* 
If we had a standard consisting of 371.25 grains of pure 
silver, and gold were worth t,2 times as much as silver, then 
the English par would be $9.74-!- ; because 113 grains of 
gold would be worth 113 times 32, or 3,616 grains of silver, 
and 3,616 grains of silver would make $9.74-!- dollars con- 
taining 371.25 grains each. 

Having now in mind the nature of the par of exchange, 
we see that this par can never vary^ between two countries 
using the same metal as standard, provided the amount of 
nletal used is not changed by law. Twenty-three and 
twenty-two hundredths grains of gold will always be con- 
tained in one hundred and thirteen grains just 4.866+ 
times, and each grain of gold will have at the same time 
the same value as every other. But, if one nation has gold 
for a standard and the other has silver, the fact is very 
different. A grain of gold may be worth 32 grains of 
silver today, 35 grains tomorrow. 30 the next day, 40 the 
next, and so on. And every change in the silver value of 
gold, or the gold value of silver, whichever you please, 
must alter the par of exchange between a gold country and 
a silver country. Thus, if in the example which closed the 



*English, 113 grains pure gold; American, 23.22 grains. 



REQUISITES OF GOOD STANDARD 271 

last paragraph, i grain of gold had been worth 40 of silver 
instead of ^2, the par of exchange on England would have 
been $12.17; since 113 grains of gold would then be worth 
4,520 grains of silver which would make 12.17-]- dollars 
containing 371.25 grains of silver each. If i grain of gold 
had been worth 45 of silver, the par would have been 
$13.69-!-. And so on. 

But, again, it is evident that, if we have a fluctuating 
par of exchange, we shall also have a more than normally 
fluctuating rate of exchange. For, normally, the rate can 
vary from par only about 3 cents each way and, therefore, 
can have a total range of variation amounting to only 6 
cents.* But, if the mi ddle ])oint itself, the par of exchange, 
can vary ^Jiiere is no limit to the fluctuations of the rate. 

Finally, it is easy to see that such possibilities of fluctua- 
tion in the rate of exchange must greatly increase the risks 
of international trade. The importer can never know, at 
the time of ordering goods, what the exchange with which 
he will pay for his purchases will cost him. The exporter 
can never know, at the time of sale, what the exchange in 
which he receives payment will net him. Manifestly, im- 
porting and exporting, under such conditions, would, with- 
out some protective device, be highly speculative operations. 
As a matter of fact, when a country has a standard which 
causes constant fluctuations in the par of exchange on the 
countries with which its most important trade relations are 
maintained, the persons engaged in foreign trade make a 
practice of insuring themselves by buying or selling ex- 
changef in advance. This, of course, improves the situation 
as respects the matter of risk, but increases the expensive- 
ness of foreign trade. It is, thus, evident that we have a 



* This assumes that we are still talking about London exchange,- 
as estimated in American money. 

tOr, what amounts to the same thing, buying or selling tlic 
metal zvhich co)ist!futcs flic standard of flic outside countries, — 
usually gold. 



272 chapte;rs on money 

weighty reason for choosing a standard in common use, 
in the fact that such a standard will secure a stable par of 
exchange with neighboring countries. 

The second important argument for a standard in com- 
mon use, that it diminishes the risk incident to international 
dealings in capital, must now receive a moment's attention. 
First, let us be clear that the risk is diminished. At first 
sight, one might imagine that any element of risk growing 
out of the maintaining of different standards in borrowing 
and -lending countries would be eliminated by special con- 
tracts, i. e., capitalists in a gold country lending to people 
in a silver country would shut out all risk by requiring the 
insertion of a gold clause in the bonds. This, however, does 
not quite completely cover the case. In the first place, a 
special gold clause does not make the lender's risk as small 
as it would be if the borrowing country had a gold stan- 
dard. There is always danger that the borrower will de- 
fault on the contract, — whether by an act of downright 
dishonesty or through sheer inability to pay ; and the danger 
from both of these sources is greater in lending to a coun- 
try having a different standard than in lending to one 
which has the same standard. Thus, respecting the danger 
from dishonesty, it is far easier for a borrower to reconcile 
his conscience to refusing payment //; a standard different 
from that zi'hich obtains in- most of his relations, than to 
repndiate *the debt altogether. Rut the case of sheer 
inability to pay is still clearer. If the luetal which 
constitutes the standard of the borrowing country 
experiences a marked decline in value, measured in 
the standard of the lending country, the difficulty of pay- 
ment is greatly increased. A corporation which receives its 
income in declining silver may presently find itself simply 
unable to pay either interest or principal. 

Rut this last point suggests that a common, inter- 
national, standard has the great advantage of diminishing 
the risk of the borrozver as well as the lender. For, ob- 



REQUISITES OF GOOD STANDARD 273 

viousl_v, the risk is not all on one side. The borrower may 
commit himself to engagements which were reasonable 
under the conditions prevailing when they were made, but 
which become otherwise when the conditions have changed. 
Now, it will often be true that one of the worst changes 
which can happen to him is a decline in the monetary 
standard obtaining in his country. His income, as meas- 
ured in his own standard, is often substantially fixed, e. g., 
is determined by legally fixed transportation rates. If, then, 
that standard falls, his income inevitably goes with it. In 
consequence, that income is no longer able to meet the 
charges of a loan fixed by a standard which has experienced 
no such decline. 

The third reason for choosing an international standard 
— that it permits the free flow of money between the coun- 
try and neighboring countries — probably needs no elabora- 
tion at this stage. The discussions of the chapters devoted 
to the movements and distribution of money and to the 
principles determining the value of money, have practically 
anticipated what we should need to say here. 

The fourth argument — that an international standard 
will be more constant in value — ought, perhaps, to receive 
a little amplification, though it also has been largely antici- 
pated. The contention is, that, if we suppose gold and 
silver to be about equally steady in value, — barring the 
influence of their difi^erent positions as money, — neverthe- 
less, as long as gold is the standard in general use among 
the great commercial nations while silver is used only by 
a few backward peoples, gold will tend to show more con- 
stancy of value. For this there are several reasons. First, 
any very extensive and fairly stable employment of a com- 
modity tends to steady its value, for such employ- 
ment secures for that commodity a steady demand. 
Its widespread use as money does this for gold. 
The demand for it does not experience so wade and 
sudden fluctuations as might otherwise be the case. In the 



274 CHAPTERS OX MONEY 

second place, the peculiar office of standard money involves 
keeping great stores of it in banks or public treasuries where 
its presence is known to the public and operates to steady 
its value. A very slight rise at any point will call out 
these stores. When a decline sets in, these stores tempo- 
rarily swell. Finally, the peculiar nature of the processes 
by which changes in the value of money must be effected, 
necessarily makes such changes far slower and smaller 
than those which like conditions would bring about in any 
other commodity. This point, however, has been covered 
with sufficient fulness in Chapter VI, and, hence, will receive 
no further attention here. 

The practical application of this discussion concerning 
the internationality of the standard is too evident to need 
extended comment. Any scheme which gives to a country 
a standard exclusively its own is at once shut out, unless 
reasons of most extraordinary weight can be advanced in 
its support. In our day, it is about as reasonable for one 
country to have a standard all its own, as it would be for 
a man to make a road all his own, going nowhere and con- 
necting with no other roads, or as it would be for Michigan 
to have for its railway tracks a gauge three inches narrower 
than that used by neighboring states. Accordingly, such 
agitations as have for their object the adoption of a paper 
money standard, or the multiple standard, or symmetallism, 
are, for most men, at once shut out. The purely local char- 
acter of such standards would make them entirely inade- 
c}uate, however good they might be in other respects. The 
case of bimetallism or silver is scarcely any better. In fact, 
since, for one reason or another, gold has become the mon- 
etarv standard of almost all civilized nations, we can not 
afford to choose any other unless we can find, in favor of 
such a course, reasons of almost impossible excellence. 
Gold may not be in other respects the best standard possible, 
but its international character, its world-wide prevalence, 
nuist furnish an arsfument for its maintenance able to oft'set 



REQUISITES OF GOOD STANDARD 275 

very many objections. To leave gokl and s^o to silver, — 
to give up the standard of those countries with which 
eighty per cent of our trade is carried on and adopt the 
standard of those countries to which perhaps six or eight 
per cent of it belongs— to leave the group which includes 
Great Britain, France, Germany, Russia, and Japan, in order 
to join the group of which China and Mexico* are the chief 
members, — such a course, it would be difficult, almost im- 
possible, to justify, by any conceivable argument. 



*No longer true of ]\Iexico (1906), 



CHAPTER VIII. 

THE PROPER REGULATION OF THE BANK NOTE 

CIRCULATION. 

The chief problems offered to the student by the bank 
note circulation are these three: (i) How shall this kind 
of money be kept at par with standard uKiney? (2) How 
shall the holders of such money be secured against loss, 
should the issuing" bank default on payment? (3) How 
shall this money be given that elasticity which will enable 
it to play well its part, as that constituent in the system 
which is depended on to adjust the stock of money to the 
need for money? Parity, ultimate security, and elasticity, 
— these are the three principal characteristics which wise 
regulation seeks to secure for the note circulation. 

I. THE PARITY OF I'.ANK NOTES. 

In general, all methods of insuring parity mav be 
described as devices whereby a guarantee is given to the 
note-holder that, in case he cannot use the bank note in the 
ordinary course of trade, he can easily make some other 
disposition of it which will not involve loss. Lender that 
condition, everyone is willing to become a note holder and. 
so, is willing to accept the note at par. 

The principal devices coming under tlv's description are 
two : ( I ) making the note a valid tender in some important 
relation, and (2) providing for its easy, instant, and con- 
stant convertibility. It is doubtful whether the former could 
ever, by itself, maintain parity. Probably, however, it con- 
tributes greatlv to the result, when the conditions for secur- 



REGULATION OF BANK NOTES 277 

ing convertibility are inadequate, as is commonly the case. 
In the national bank system of the United States, the notes 
are a legal tender in some payments to, and by, government, 
and they are always a legal tender to national banks. In 
view of the fact that getting them redeemed involves some 
trouble and expense, it is not impossible that, without these 
legal tender prerogatives, they would be at a slight discount, 
when far from the locality of the issuing bank or the United 
States treasury. 

But, while being a valid tender in some important rela- 
tion contributes to maintaining the parity of notes, the onlv 
sure method of securing this characteristic is to keep them 
easily and constantly convertible. The holders of such 
notes must be able at all times, and in practically all places, 
to exchange them, without material trouble or expense, for 
standard money. As a first step toward this end, the issu- 
ing bank must, of course, redeem the notes over its own 
counter. But this is not enough. Maintaining this con- 
dition is sufficient to keep the notes at par, in the immediate 
vicinity of the issuing bank ; but it has often proved unable 
to hinder those notes from circulating at a discount in dis- 
tant places. The ideal plan would involve a great number 
of local redemption agencies scattered over the country, 
with one or luore central agencies for redeeming the notes 
taken in by the local agencies. In practice, however, it is 
probably sufficient to provide for redemption at one or more 
important banking centers. For the existence in the trade 
centers of an opportunity to get the notes redeemed makes 
the banks of those centers ready to receive them at par : 
while this fact, combined with the additional one that banks 
in lesser places have frequent occasion to send money to 
the centers, makes this latter class of banks quite ready to 
receive the notes at par. Thus, the maintenance of central _ 
redemption secures what is, in effect, local redemption 
throughout the country. 

In the banking system of the United States, central 



278 CHAPTERS ON MONEY 

redemption is provided for at the Federal treasury.* In 
order to provide the funds for the work, each bank must 
keep with the Treasurer an amount of lawful money equal 
to five per cent of the amount of notes it issues. As fast 
as this fund is drawn down by redemptions, the bank is 
called on to make it good by sending in the needed cash. 
Local redemption is not formally provided for, — the issuing 
banks are not obliged to redeem each other's notes. But a 
provision little short of this requires each to accept, as legal 
tender in payment of debts, the notes of all other banks. 
While not a good redemption system, judged by its ability 
to secure "homing power" in the notes, that of the United 
vStates is entirely adequate to secure parity. 

In the preceding discussion of paritw I have had in 
mind the case of notes issued by a bank .9/;'// solz'ciit. But, 
the problem of keeping notes at par may also arise, when 
the issuing bank has gone info Uquidation. If we suppose 
that, in such a case, there is no doubt as to the ultimate 
security of the note, nevertheless that note ma}- not be gen- 
erally accepted at par, may pass at more or less discount, 
pending the completion of arrangements for making it good 
out of the assets of the bank. 

This particular case of parity, which one might desig- 
nate as "liquidation" parity, may be more or less adequately 
provided for in several ways. One device, which probably 
contributes, at least, to the desired result, is to provide that 
the notes of failed banks shall bear interest until paid. This 
makes them a banking investment, hence, makes banks 
ready to accept them. Another, and far more effective, 
device is requiring all banks in the system to maintain a 
fund — known as a safety fund — from which the notes of 
any bank in liquidation shall be redeemed. This method 



*Authorities seem in conflict as to whether redemption is under- 
taken at the sub-treasuries. 



REGULATION OF BANK NOTES 279 

of procedure was adopted in Canada in 1890. Their bank 
notes were already amply secure, that is, they were sure to 
be paid in the end ; but, during the settlement of the affairs 
of a failed bank, its notes were often at a discount. Under 
the present system, such a thing would not be possible. 

A third method of securing "liquidation" parity is im- 
mediate redemption by a guarantor of the notes. This is 
the system at present in vogue in the United States. The 
Federal treasury agrees to redeem, out of its own funds, 
the notes of an}' failed bank, recouping itself by the sale 
of bonds or other property belonging to the bank : and this 
redemption it undertakes jiisf as soon as the issuing bank 
shuts its doors. Naturally, under this condition, the notes 
can never go below par. 

II. THE SECURITY OE BANK NOTES. 

Considered from the standpoint of the methods employed 
to make the notes secure, systems of issue may be grouped 
into four classes: (i) Pure Credit, or Free Issues, (2) 
Regulated Credit Issues, (3) Secured Issues, and (4) 
Guaranteed Issues. The first two of these might be classed 
together as Asset Issues, in contrast with Secured or Guar- 
anteed Issues. That is, no special property is set aside to 
secure them as in the Secured Issues, nor does any institu- 
tion guarantee them, so that the note holder must depend 
on the ordinary assets of the issuing bank to insure him 
against loss. 

A. Pure Credit Issues. 

The nature of Pure Credit Issues is suggested by the 
name. They rest on credit solely, the same sort of credit 
that supports any personal note. They are free, that is, 
unregulated, save as all contracts are regulated. The 
banker is allowed to borrow other people's money by issuing 
his circulating notes, just as he would borrow other people's 



28o CHAPTERS ON MONEY 

money by giving an ordinary note payable in ninety days, 
or in two years, or at the end of any definite period. The 
whole transaction is looked on as being the business of 
nobody except the banker and the person who accepts the 
note and, thereby, becomes the creditor of the banker. If 
such person choose to trust the banker, that is his own 
affair, calling for no interference on the part of the state 
or of anyone else. 

In a system like that just described, security manifestly 
depends on the promptness and thoroughness with which 
the rights of the note holder, under the ordinary law of 
contracts, are enforced. The note of the banker is payable 
on demand. If the banker does not keep the engagement, 
he can be forced into bankruptcy. Anxiety to avoid this re- 
sult would seem to insure that bankers would be at least as 
certain as other debtors to keep their engagements, and that, 
therefore, the security of these notes might be left to the 
banker's self-interest and to the legal processes ordinarily 
used in enforcing contracts. Yet experience and theory 
alike have fairly established a contrary doctrine, — have con- 
vinced almost all authorities that no proper guarantee of 
the security of circulating notes is furnished by the laws 
regulating ordinary promissory notes. This point is so 
important that the reasoning on which it is based must be 
explained somewhat fully. 

The essence of the argument for treating the two kinds 
of engagements differently is this : in several particulars 
which from our present standpoint are vital, circulating 
notes and ordinary promissory notes are essentially differ- 
ent, and the relation of creditor and debtor formed in the 
one case is essentially different from that formed in the 
other. In the case of the ordinary note, the relation is 
entered into by the creditor (i) deliberately, (2) con- 
sciovisly, (3) freely, (4) with full sense of responsibility on 
his part, (5) and under conditions which make it at least 
probable that he w^ill be fully informed as to the financial 



REGULATION 01? BANK NOTES 28 1 

standing of his debtor. With a circulating' note, 
all these conditions are lacking. ( i ) There is no time for 
deliberation, as the note is offered many times a day in the 
course of trade, when a decision to accept or reject must 
be made instantaneously. (2) Again, clear consciousness 
as to what is being done is lacking. There is, and ought to 
be, a family resemblance among the notes of dififerent banks 
and, indeed, among all kinds of paper money, so that few 
people remark whether the bill offered them is issued by a 
Michigan bank or a California bank, or even whether it is 
a bank note at all rather than a treasury note or a silver 
certificate. Nor is this to be imputed to the note receiver 
as a fault. Circulating notes form part of the money of 
a country, and ought to be of such a character that only the 
most cursory attention is needed, to ascertain their good- 
ness. To illustrate from analogy, a person walking along 
the sidewalk in a dark evening has a right to expect it to 
be free from holes or obstructions. If he proves mistaken 
and suffers a fractured leg, the city ought to pay him dam- 
ages, without murmuring. 

(3) But not only does the creditor, in the case of cir- 
culating notes, enter into the relation without due delibera- 
tion and clear consciousness, he also enters it imthout full 
freedo>ii of action. If he be a retail dealer or a working- 
man, he is almost compelled to accept any kind of money 
offered him, under penalty of losing patronage or oppor- 
tunities for work. Certainly, he can not afford to be very 
particular in the matter. (4) Again, it is inevitable that, 
in the case of circulating notes, the creditor will lack greatly 
in a proper sense of his responsibility in the matter. With 
an ordinary note, the relation about to be formed between 
creditor and debtor is a more or less permanent one, which 
fact stimulates the holder to inform himself carefully with 
respect to the solvency of the debtor. But the relation 
between the note holder and the issuing bank lasts but a 
few hours or days ; and, consequently, people will take 



282 CHAPTERS ON MONEY 

some chances rather than interrupt business to settle the 
question of solvency. (5) Finally, it is not at all proper 
to assume that every man who accepts a bank note has 
either the capacity or the facilities needful for ascertaining 
the standing of his debtor. Very often he is a man without 
property, unfamiliar with such matters, uninformed as to 
the status of the particular bank, and too far away from 
its domicile to get the information needed. To leave such 
a person to look out for himself, argues on the part of the 
state a very serious neglect of its duties. It must, there- 
fore, be conceded that the system of Free Issues, with no 
guarantee beyond those of the ordinary law of contract, is 
not an adequate system in respect to security. 

B. Regulated Credit Issues. 

Under this head, are included all those systems of note 
issue which, while undertaking to do something for the 
security of the notes, do not attempt to accomplish the 
object directly, as for example by requiring the pledging 
of bonds to cover them. Instead, these systems content 
themselves with defining in one way or another the cir- 
cumstances and conditions of issue, with the intention of 
thereby increasing the probability that the notes will be 
secure. Schemes of this sort are very numerous, and some 
grouping of them is almost necessary. Perhaps as con- 
venient a classification as any is one which makes five 
groups: viz., (a) those which try to gain security by a 
proper placing of the power of issue, (b) those which seek 
the end by restricting the amount of issue, (c) those which 
restrict the circulation of the notes, (d) those which dictate 
with respect to the assets kept by the bank, and (e) those 
which impose some degree of government superinsion. 
Obviously, these different methods of regulation may be 
combined, one with another, as also with Secured Issue 
systems, or Guaranteed Issue systems. 

The method of procedure which aims to furnish security 



RhX'.UI.ATlON OF BANK NOTES 283 

by a proper placing' of the right of issue gives us two cases, 
( I ) restricting the right of issue to some particular bank or 
class of banks, and (2) restricting the right to a special 
department within the l)ank. Restricting the right of issue 
to special banks has taken a variety of forms. Sometimes 
the exercise of this function has been permitted only to 
banks having special charters from the legislature. Further, 
the legislature has granted such charters very sparingly, in 
France to one bank only, in England and Germany to one 
principal one together with a few others which are per- 
mitted to play a subordinate role. In other cases, the right 
of issue has been limited to companies incorporated in a 
certain way and acting under certain well-defined condi- 
tions. In the United States, the right is by indirection 
restricted to banks organized under Federal law. 

That this plan of exercising great care in placing the 
right of issue tends to increase the security of the notes, 
can not be doubted. Manifestly, it diminishes the chances 
that this important function shall pass into the hands of 
banks which are too loosely organized, too weak, too badly 
managed, or too dishonest, to furnish a really safe note. 
In this respect, the very best system is that which limits 
the issue of notes to a single great bank, though of course 
such a system may be objectionable on other grounds. The 
publicity which the afl^airs of such a bank receive, the high 
sense of responsibility which its imique position insures, 
the pride which its management feel in maintaining un- 
broken the prestige of a great historic institution, — these 
alone are almost sufficient to insure the perfect security of 
the notes wdiich it issues. 

The second way of trying to gain security for the notes 
by a proper placing of the right of issue, involves com- 
mitting that power to a particular department within the 
issuing bank, or, in other words, a separation of the function 
of issue from the ordinary banking functions. This plan, 
which is illustrated by the Bank of England, contributes 



284 CHAPTERS ON MONEY 

to the ultimate security of the notes in at least two ways. 
First, it in some measure frees the note issue from the con- 
trol of those persons in the bank management who are 
under most temptation to be imprudent in extending unduly 
the issue, since these persons will belong to the loan, rather 
than to the issue, department. In the second place, anv 
evasion of legal restrictions with respect to the amount or 
conditions of issue is more difficult when the issuing of 
notes is under the control of a separate department, since 
such evasion would in this case require guilty collusion 
between the responsible managers of the two departments. 
Doubtless this plan of procedure is not of great independent 
importance ; but, when combined with other methods of 
regulating issue, as for example restricting the amount and 
defining the proper securities, it unquestionably assists in 
insuring the securitv of the notes. 



'fe 



The efficiency of the plan for promoting security which 
li)nits the amount of issue is manifestly derived from the 
fact, that restricting the quantity diminishes the danger that 
an imprudent management will extend its issues until bank- 
ruptcv is inevitable, or that, in case of bankruptcy, the bank 
will find the amount of its outstanding notes too great to 
be paid. In our day, substantially every banking system of 
importance puts limits of one or more kinds on the amount 
of notes issued. Such limits may be direct or indirect ; that 
is, a maximum may be definitely specified, or conditions of 
issue may be imposed which by indirection limit issues. In 
the case of direct restriction, the limit may be defined abso- 
lutely in dollars, or pounds, or francs, or relatively to some 
other factor in banking. The Bank of England illustrates 
the former plan ; — its issue being limited to a little less than 
eighteen million pounds.* The relative, or proportional, 



*There is no limit to the issue of such notes as represent gold 
actually present in the Issue Department. 



RRGUtATlON Of' BANK NOTliS 285 

limit system is seen in our national bank system, which pro- 
vides that a bank must restrict its note issue to an amount 
equal to its capital. Again, the limit of issue may be fixed 
as in England and France, or clastic as in Germany, where 
the legal maximum may be passed, but under penalty of a 
five per cent tax. 

Of indirect methods of restricting the quantity of notes 
issued, three may be mentioned. These are ( i ) limiting 
the notes issued to those of comparatively high denomina- 
tion, (2) providing for the frequent redemption of notes, 
and (3) restricting the territory within which notes are 
allowed to circulate. Limiting notes to the higher denom- 
inations is an almost universal practice. In Germany, no 
bank notes under one hundred marks (about $25) may be 
issued ; in England, none under five pounds. In the United 
States, the lower limit is now ten dollars for two-thirds of 
the total issue, and five dollars for the remaining one-third. 
This restriction as to denominations manifestly acts as a 
limitation on the total amount issued, and that much more 
because it is a restriction to large denominations, since for 
such denominations there is comparatively little demand. 

Again, providing for the frequent redemption of notes 
tends to restrict the amount out. Of course, a note which 
was redeemed yesterday and which, if reissued, will at once 
return for redemption, can legally be reissued today at the 
arbitrary will of the bank. But, practically, such a note can 
not be reissued.* It, therefore, can not be kept in cir- 
culation, unless the business community has work for it to 
do. On the other hand, if redemption is infrequent, a bank 
will have power to push out, and keep out, a quantity of 
notes much in excess of business needs. f Finally, the pol- 



*See page 304. 

fFrequent redemption contributes to security in other ways, 
(i) A note with a short life is less likely than another to spoil on 
the hands of the holder. (2) Frequent redemption means frequent 
testing of the bank's capacity to meet its obligations, and, therefore, 
gives opportunity to discover any signs of approaching bankruptcy. 



286 CHAPTERS ON MONEY 

icy which restricts the circulation of the notes of a bank 
to a certain defined territory obviously tends to restrict the 
total issued. If the notes of New England banks could not 
be paid out by any bank outside of New England, except 
to a redemption agency or some person or company located 
/';/ New England, surely fewer of such notes would be in 
circulation than now, when they may be, and are, paid out 
from Florida to Washington. 

As we have just seen, the policy of limiting the territory 
within which a note is permitted to circulate, tends to pro- 
mote security, by acting as an indirect limitation on the 
amount issued. But this policy also contributes in a more 
direct way to furnishing security, in that it enables us to 
confine the circulation of the notes to those persons who, 
on account of their nearness to the issuing bank, are pre- 
sumably prepared to judge of the goodness of such notes, 
and to enforce their judgment. A similar advantage is 
derived from another of the provisions mentioned under 
the preceding head, i. e., limiting the issue to notes of 
higher denominations. This policy tends to keep such notes 
circulating chiefly among persons who presumably have 
property and business experience, and who, therefore, are 
much more likely to secure themselves from loss than are 
the classes of persons among whom small bills circulate. 

The fourth indirect method of providing for the secur- 
ity of notes is to dictate as to the kind and amount of 
assets wdiich an issuing bank must keep. Here we doubtless 
come very close to the systems of Secured Issues ; still the 
cases show a vital dift'erence. In secured issue systems, 
those assets the keeping of which is required by law are 
specifically pledged to meeting the notes, rather than some 
other, or all, liabilities of the bank. Whereas, in the case 
before us, the law requires the bank to maintain a certain 
kind and volume of assets, but does not reserve these assets 
for the payment of notes. This method of procedure is 



REGU1.ATIU\ OF BANK NOTES 287 

illustrated in the German banking law. The Imperial Bank 
must keep on hand an amount of cash equal to one-third 
of the amount of notes out, and assets in commercial paper 
equal to the remaining two-thirds of the notes. But neither 
this cash nor these assets are reserved for the payment of 
note holders. Should the bank fail, every creditor, whether 
note holder or depositor, would have an equal claim with 
every other on these assets (Dunbar p. 235). Such pro- 
visions as these can have only a very limited efficacy in 
providing for the security of notes. 

Only one other indirect method of furnishing security 
need be mentioned ; viz., imposing on the banks some degree 
of government supervision. This may involve the requir- 
ing of reports as to the condition of the bank, providing 
for inspection by public officials, furnishing the note blanks, 
and so on. Such supervision is in greater or lesser degree 
present in nearly every important system. That it is likely 
to increase the security of the note circulation is sufficiently 
evident. 

C. Secured Issue Systems. 

In this study of the methods of organizing bank note 
systems with respect to the security of the notes, we have 
disposed of the Free Issue systems and the Regulated Issue 
systems. We come now to the Secured Issue systems. Here 
are included all which attempt to safeguard the note holder 
by giving him a special claim on all, or some, of the pro- 
perty owned by the issuing bank. Of such systems, the 
simplest is that which gives the note holder a first lien on 
the general assets of the bank. That is, should the bank 
fail, the note holder must be paid in full before other cred- 
itors get anything. The fitness of this device to contribute 
to the security of notes is plain. Banks seldom fail so 
completely that there are not enough assets to pay their 
circulating notes. Obviously, however, the discrimination 



288 CHAPTERS ON MONEY 

against depositors is rather hard on them ; and some writers 
have argued against this and every other plan which gives 
the note holder any special advantage as compared with the 
depositor. The general opiriion, however, supports the 
contrary doctrine. The argument is substantially the same 
as that employed on pp. 280-282 to justify any regulation of 
note issues. Note holders are a peculiar type of creditors. 
They do not, like depositors, enter into the relation deliber- 
ately, consciously, freely, with full sense of responsibility, 
and under conditions which make it probable that they will 
be informed as to the financial standing of the bank. Their 
position, therefore, ought to be, and commonly is, more 
carefully safeguarded than that of depositors. 

In the case just considered, the special claim of the note 
holder falls on all the property of the bank. In other cases, 
his claim is against some particular property. Under this latter 
plan, a problem arises as to what forms of property are 
best suited for the purpose. The general choice lies between 

( 1 ) special securities, such as bonds and mortgages, and 

(2) ordinary banking assets, such as the notes and bills of 
merchants and manufacturers. If the former are decided 
upon, choice has again to be made among bonds, stocks, 
and mortgages. 

From the ■ standpoint of security, the natural decision 
is for special securities rather than ordinary assets ; though 
the case is not so clear as appears at first sight. Ordinary 
banking assets are likely to be decidedly wanting in a period 
of panic ; for, at such a time, bankruptcy may become 
almost s:eneral. It certainly would be necessarv to allow 
more for shrinkage in the case of ordinary assets than in 
that of special securities. Among special securities, stocks 
would almost certainly be shut out, on account of their 
fluctuating value. Mortgages, again, are less desirable than 
bonds, because they are difficult to convert into cash. This 
fact unduly prolongs the period of liquidation, or involves 
considerable sacrifice on the securities. 



REGULATION 01'' BANK NOTES 289 

There is, however, a stock argument against any but 
the most easily convertible securities which is less weighty 
than is usually supposed. That argument is, that, since 
the notes to be secured are demand obligations, it is neces- 
sary that the collateral behind them should be iiniiiediafely 
convertible, if it is to keep those notes from falling off in 
value. This argument, however, confuses the object of 
requiring collateral with another quite important object 
which should be provided for by other means. I mean, of 
course, "liquidaltion" parity. The law should see that, 
through a safety fund or some device equally efficient, the 
notes of failed banks are kept instantly convertible into 
lawful money. This being done, all the time needed can 
be taken for liquidation, and ultimate goodness will be the 
chief really important requisite in the security which is put 
behind the notes. 

Another problem which presents itself, when notes are 
backed by specially pledged securities, concerns the cus- 
tody of these securities. Shall these securities be left in 
the keeping of tlie bank which issues the notes based on 
them, or shall they be deposited with some outside institu- 
tion acting for both the bank and the noteholder? The 
former plan is illustrated by the Bank of England and the 
Swiss banks. The Bank of England must have behind its 
notes a corresponding amount of the public debt ; but it has 
itself the custody of this debt.* So, the Swiss banks must 
have a fund of cash and commercial paper as specific secur- 
ity for their notes ; but they themselves keep this fund. The 
plan of having the noteholder's securities kept by a third 
party may be illustrated by the system which was in vogue 
in New York state between 1838 and 1863. Under that 
system, the noteholder's securities were deposited with the 

*The statute does not specifically provide that the government 
debt in the issue department of the Bank of England shall be re- 
served to pay noteholders, but all agree that this course would be 
insisted upon by the courts. 



290 CHAPTERS ON MONEY 

State Comptroller. In case of a bank failure, it was the 
diitv of the Comptroller, as trustee for the noteholders, to 
dispose of the securities deposited with him, and divide the 
proceeds among the noteholders. This system was extended 
from New York to other states, and became quite general 
in the northwest. In was later superseded by the present 
National bank system, which, though often classed with 
the New York system, is essentially different, as will be 
shown in a moment. 

That the system which requires the note securities to 
be kept in the custody of a third party, is, from the stand- 
point of ultimate safety, the better one, seems evident 
enough. If a bank is imprudent, or dishonest, enough to 
fail, it is likely to be imprudent, or dishonest, enough to dissi- 
pate the property on which its notes are secured. Doubtless 
this conclusion is not absolutely necessary. Property spe- 
ciallv pledged for the security of note issues will very likely 
be handled more discreetly than general assets. But the 
svstem can never give anything like the absolute security 
furnished by the other plan. 

It ought, perhaps, to be mentioned that several recent 
plans of monetary reform which have involved requiring 
securities behind the notes, have provided that these secur- 
ities should be kept in the custody of the Clearing House 
Association to which the issuing bank belongs. There 
seems little reason to doubt that a scheme of this sort would 
give to the notes adequate, if not absolute, security, par- 
ticularly if issues of this sort were limited to the largest 
cities. Prudent management would be assured in an organ- 
ization representing and controlled by the leading banks ; 
while ultimate security would be insured by the joint 
responsibility of all the banks. There are, however, reasons 
for arguing that this particular plan of issue should be 
reserved for a special type of currency, known as "emer- 
gency circulation." In that case, security for the ordinary 
circulation should be sought in some other way. 



REGULATION OF BANK NOTES 29 1 

D. Guaranteed Issue Systems. 

Tlic essence of this system is to be fcmnd in the fact 
that some institution, or group of institutions, outside the 
issuing- bank becomes sponsor for that l-jank, guaranteeing 
that its notes shall be paid in any, and all, cases. As an 
almost necessary complement to this provision, the guaran- 
tor gains certain rights or powers over the property of the 
issuing bank, by virtue of which he is insured against loss 
from fulfilling his duties as guarantor. This plan may be 
applied in the form of an Immediate, or an Ultimate, guar- 
antee. That is. the guarantor might be bound to pay the 
notes of a bank which had failed, as soon as the fact was 
announced, and reimburse himself at his leisure ; or he 
might promise to pay only after the attempt to collect them 
from the assets of the bank had been tried and proved a 
failure. The only examples of this system involve an im- 
mediate guarantee. This is manifestly the better of the two 
plans, since it is bound to shut out even a temporary dis- 
count on the notes. 

The Immediate Guarantee plan involves the existence of 
a fund from which the notes of a failed bank can be paid 
just as soon as it has refused to redeem them in the ordinary 
way. In the United States, the guarantor is the Federal 
treasury and the fund used to redeem the notes is the Gener- 
al Fund, i. e., the fund from which ordinary expenses are 
paid. In the only other case of a guaranteed issue system, the 
guarantee is a joint guarantee of all the banks in the system, 
and the fund for immediate redemption purposes is a fund 
accumulated by making an assessment on each bank, equal 
to from two to five per cent of its circulation. When de- 
pleted by redemptions, this fund is restored by new assess- 
ments on all banks in the system. This fund furnishes the 
name which is usually given to the system of a joint guar-' 
antee, viz., the Safety-Fund system. 

One of the most notable examples of the Guaranteed Is- 



292 chapte:rs on money 

sue system is to be found in the National Bank system of 
the United States. Here the guarantor is the Federal treas- 
ury. That is, the Federal treasury promises to redeem on 
sight all notes of insolvent national banks,* thus giving to 
those notes all the security which the credit of a great and 
rich government can furnish. At the same time, the Treas- 
ury is fully secured against loss by several simple provi- 
sions. First, it has in its possession, in lawful money, a 
fund belonging to the bank ecjual to five per cent of the 
bank's circulation. Secondly, it is custodian for Federal 
bonds belonging to the bank, equal in value to the total cir- 
culation. Thirdly, it has a first lien on all the other assets 
of the bank. Evidently, it can not lose anything by main- 
taining this relation. Of the Joint-Guarantee form of the 
guaranteed issue system, the Canadian banking system fur- 
nishes the most notable example. Its character is sufficient- 
ly indicated in the preceding paragraph. 

The superiority of the Guaranteed Issue system, espe- 
cially in our form of it, over the New York, or Secured Is- 
sue, system is evident. In the latter, it was always possible 
that the securities deposited would prove insufficient, in 
which case the noteholder had no further recourse and must 
pocket his loss. In the system of Treasury guarantee, on 
the other hand, the noteholder is as safe as the good faith 
and unlimited resources of a great nation can make him. 
Again, the immediateness of the guarantee under our sys- 
tem is a decided advantage. On the New York plan, va- 
rious processes had to be gone through before the noteholder 
could be reimbursed. The securities had to be declared 
forfeited to this use, had to be sold, and the proceeds dis- 
tributed. All this meant some delay, consequently some 



* The Federal treasury is also the central redemption agency for 
solvent banks. But, in redeeming the notes of solvent banks, it is 
acting as the agent of the banks, rather than as a guarantor of the 
notes. 



REGUr.ATlON OF BANK NOTES 293 

loss of interest, and probably a temporary discount on tbc 
notes. With our immediate Treasury g^uarantee, the case 
is quite dififerent. The noteholder need not wait a day for 
his money ; and, of course, the note experiences no discount. 
In fact, it circulates at par years after the issuing bank has 
gone out of business. 

In recent years, projects have been brought forward for 
modifying our national banking law so as to permit the use 
of bonds other than those of the Federal government, as 
security that the Treasury shall not lose by its guarantee of 
bank notes. This, or some other, change seems inevitable 
from the fact that the supply of Federal bonds is bound 
to be exhausted by the payment of the debt. Doubtless it 
would be difficult to get bonds in every way as satisfactory 
as those of the national government, but the ordinary rea- 
soning on the point shows some confusion. Writers fre- 
quently bring forward the classic argument that notes, 
since they are payable on demand, can not be good, unless 
backed by securities which are immediately convertible, and 
convertible without loss. That this is of doubtful validity, 
even when applied to a secured issue system, was brought 
out a few pages back. But in any case, it has no applica- 
tion to guaranteed issues. For, under that system, the 
office of the securities is to protect, not the noteholder, but 
the guarantor of the notes, i. e., in our case, the Federal 
treasury. Under our system, accordingly, a security is en- 
tirely adequate, if it insures the Treasury against ultimate 
loss. For it is no particular hardship to the Treasury to 
wait during a few months, or even years, if need be, till 
the affairs of the bank can be wound up, and its assets dis- 
posed of under ordinarily favorable conditions. 

Besides the system of government guarantee, it is pos- 
sible to have that of a Clearing House Association guaran- 
tee, or a Joint Bank guarantee. Of the former, there is no 
actual case, though the idea is utilized in various reform 



294 CHAPTERS ON MONEY 

projects which have from time to time been brought for- 
ward. The joint-bank guarantee was a vital part of the 
New York safety fund system, as it is of the present Can- 
adian safety fund system. That is, the safety fund, ex- 
plained on page 278, is not merely a device for securing 
the parity of the notes during liquidation, though this is its 
primary object; it is also a part of a scheme for furnishing 
ultimate security. From the safety fund the notes of a 
failed bank are redeemed, not merely during the period of 
liquidation, but also finally, that is, until they are all retired. 
Into this safety fund, therefore, are turned whatever funds 
may be obtained from the assets of the bank, until its total 
note circulation is provided for. And, if these prove inade- 
quate to restore the fund, after the redemption of the notes 
of the failed bank, an assessment sufficient for the purpose* 
is made on the other banks in the system. 

III. THE ELASTICITY OE P.ANK NOTE CURRENCIES. 

In consMering what are the best means for securing 
that the notes shall possess this property of elasticity, we 
shall find it convenient to distinguish ordinary elasticity, and 
emergency elasticity. By the former is meant the capacity 
to expand or contract, according to the changes in need 
which characterize an ordinary year. By emergency elas- 
ticity is meant the power to expand or contract, according to 
the changes in need which characterize a commercial crisis 
and the depression which follows it. Each sort of 
elasticity will need to be studied in the two phases essential 
to both, viz., expansibility and contractility. We will treat 
first ordinary elasticity in the two phases. 



* There is in the Canadian system, however, a limit to the 
amount of the assessment for any one year. 



REGULATION OF BANK NOTES 295 

A. Ord'niary Elasticity. 

I Bxpansihility. 

First, then, how is a note circulation made capable of 
expandini^ as the need expands? Looked at broadly, this 
manifestly depends on two conditions. ( i ) The banks 
must be able to increase the circulation of their notes, as 
the need for money increases. (2) They must be disposed 
to do so. Taking up the first of these, we see that it, in 
turn, involves two sub-conditions, (a) The bank must have 
(7/ its disposal, when the time of need comes, the requisite 
amount of notes, (b) The bank must be in position to 
satisfy the conditions prerequisite to utilizing its notes. How, 
now, can these conditions be realized? 

The first condition — insuring that banks shall have at 
their disposal the necessary quantity of notes — may be met 
in either of two ways. (A) Banks may keep on hand a 
stock of idle notes, ready to be put into circulation at a mo- 
ment's notice. (B) Banks may have at their disposal mere- 
ly an unexhausted power of issue ; that is, they may de- 
pend on getting out an entirely new lot of notes to meet 
the new need. Manifestly, the plan of depending on a 
stock of idle notes more completely insures promptness in 
expansion, since getting out a new lot must, even under 
the simplest conditions, consume some time. As security 
that the bank shall have a fund of idle notes, it is necessary 
that the amount taken out* shall be in excess of the amount 
which will remain in circulation. This condition we may 
secure in either of two ways. First, we may enact such 
laws as will make it for the self-interest of banks to resort 
to this method of procedure. Secondly, the law may be 



*This phraseology is derived from a system like ours, in which 
the issuing hank gets its stock of notes from a government office 
after fuHiHing certain specified conditions. 



296 CHAPTERS ON MONEY 

framed in such a way as to put a sort of compulsion on 
banks to take the desired course. 

If we resort to the first plan of procedure, the chief need 
is to avoid making the conditions involved in getting a 
stock of notes ready for issue, onerous or expensive, and 
so making the banks unwilling to get ready a stock larger 
than, that which they can keep in circulation substantially 
all the time. Thus, under our system, a bank, in order to 
take out notes, must invest an equal amount of its resources 
in bonds, which net less than two per cent on the investment, 
must maintain at the Federal treasury a five per cent re- 
demption fund, and must pay a tax of >4 per cent on the 
amount of notes taken out. Under these conditions, such 
a bank will be careful to keep down its stock to the amount 
which can be kept busy.* It is probably impossible to rem- 
edy this difficulty completely, so long as we maintain our 
present system of issue. But, to this statement, there is an 
important qualification to be brought out in the next para- 
graph ; and it is possible still further to improve matters by 
shifting the expense of issue from taki>ig out notes to keep- 
ing flioii ill circulation. Thus, if the note tax were made a 
tax on notes /;/ circulation merely, i. e., a tax collected on 
notes only when they were in the hands of the public, this 
tax would not hinder banks from keeping extra notes on 
hand. 

But it is not necessary to depend on the purely volun- 
tary action of the banks to insure that they shall keep a 
stock of notes in excess of the amount which will ordinarily 
remain in circulation. It is always possible to resort to 
some kind or degree of compulsion to bring about this con- 
dition of things. Thus, the law might arbitrarily require 
banks to take out a certain minimum, ascertained to be in 



* Unless this is smaller than the amount of Federal debt which 
must be bought by the bank and deposited with the Federal treas- 
urer, li'hcther the bank zvishes to issue or not. That amount is one- 
fourth of the capital stock, though never more than $50,000. 



REGULATION OF BANK NOTES 297 

excess of ordinary needs. Probably this is never done ; but 
our system contains a provision which may indirectly 
amount to the same thing. That provision is the one which 
unconditionally requires every national bank to invest one- 
fourth of its capital, though never more than $50,000, in 
Federal bonds and deposit these bonds in the Federal treas- 
ury, to be used as a basis for the issue of notes, if the 
bank desires so to use them. Now, this means that the bank 
is obliged to fulfil one of the most onerous conditions of 
issue, whether or not it desires to issue. But, being obliged 
to pay the price anyhow, the bank will naturally choose to 
take the goods also. Accordingly, almost all banks in the 
system take out an amount of notes equal to the compulsory 
deposit of bonds, and so a stock of notes of this size may 
be thought of as at least quasi-compulsory. If, then, this 
stock is in excess of every day needs, as is probably the 
case, our system might be described as putting on banks a 
quasi-compulsion to keep on hand a surplus of notes ready 
for issue.* 

The preceding discussion has shown how we may in- 
sure that banks shall have at their disposal the notes required 
to meet an increase in need, on the plan of having the quan- 
tity which they take out — prepare for circulation — in ex- 
cess of what will ordinarily be wanted. But, in this coun- 
try particularly, it is more usual to depend, for this power 
to expand issues, on nczv notes, notes taken out for the oc- 
casion. This, of course, is because of the fact already em- 
phasized that the conditions of issue are so onerous as to 
make the banks unwilling to take out more notes than can 
commonly be kept out. On this plan of using }iezv notes to 



* Unfortunately, it has to be added that, in actual operation, 
the efficiency of this provision, in doing the work assigned it, is 
largely destroyed by the fact that the notes lack "homing power,", 
and, therefore, when idle do not get back to the issuing bank to be 
ready for the next expansion of need. (See the discussion on 
PP- 307-311.) 



298 CHAPTERS ON MONEY 

expand issues, the only condition necessary is, that the 
power of issue granted to the banks shall be in excess of 
ordinary needs, or what will ordinarily be kept out. In 
the system of the United States, this requirement is amplv 
met ; since the total amount of notes which may be issued is 
usually something like twice the amount actually issued. 

We have now learned how the first condition of a 
bank's being able to expand its issues. — viz., that it should 
have at its disposal the requisite quantity of notes,— is met. 
Rut this is only the first step. As indicated on page 295, 
it is also necessary that a bank be in a position to fulfil the 
requirements on which the issue of these notes is condi- 
tioned. In case the bank depends on a stock of idle notes, 
this meeting the requirements of issue means little. Biit, 
when resort must be had to new issues, at least under our 
system, a bank can not easily meet one of the essential con- 
ditions of taking out new notes, i. e., furnishing an equal 
amount of Federal bonds for deposit with the national treas- 
urer. The reason for this is, that banks are not likely to 
have such bonds on hand, because they bear too low a rate 
of interest to be a good banking investment ; while, on the 
other hand, a resort to the plan of buying bonds, when the 
new need arises, is very likely out of the question, because 
the resources of the bank are already fully invested in other 
securities. 

Various remedies for this difficulty have been advo- 
cated. The two most seriously considered are ( i ) the 
substitution of municipal and other bonds for Federal bonds, 
and (2) authorizing unsecured issues, issues based only 
on the credit and general resources of the bank, although 
insured by a safety fund and a joint guarantee of all the 
banks in the svstem.* The first plan would doubtless im- 



* Such an issue goes in the United States by the name of 
"asset currency," i. e., currency based on the ordinary assets of the 
bank, like any other obligation. 



REGULATION OF I5ANK NOTES 299 

prove matters, since banks are likely to invest some por- 
tion of their resources in bonded securities other than Fed- 
eral bonds, and so would have these on hand to deposit with 
the government as the basis of a new issue of notes. The 
second plan, however, would command much more j^eneral 
approval among specialists. The easy and certain way to 
insure that a bank shall be able to fulfil the conditions re- 
quisite to the issue of new notes is to reduce those condi- 
tions to a minimum. Do away with the security require- 
ment altogether, and, of course, vou do awav with the ne- 
cessity for investing the bank's resources in some special 
sort of securities, securities wdiich are not a normal, or us- 
ual, type of banking investment. Nor, in doing this, would 
we run a risk of having insecure notes, notes likely to in- 
volve loss in the case of the failure of the issuing bank. 
For, as we saw earlier in the chapter, asset currency backed 
by a joint guarantee of all the banks in the system has prac- 
tically absolute security. 

A third method of meeting this difficulty in our present 
system. — that banks can not easily satisfy the conditions 
upon which the right of issue is based, — is a sort of com- 
promise between the present bond-secured system and an 
asset currency. This compromise scheme would still re- 
quire that the notes should be backed by securities, and by 
securities in the custody of some institution other than the 
issuing bank. But, it chooses, for the securities, the ordi- 
narv assets of the bank, and it chooses for custodian an 
institution which is easily accessible, namely, the local Clear- 
ing House Association. From our present standpoint, such 
a svstem would be ideal. Banks would have no diffi- 
culty fulfilling this usually onerous condition of furnishing 
the securities required. For ordinary assets, just because 
thev are ordinary, are securities, an ample stock of which 
banks are sure to have on hand at all times. 

We have answered the question. How are matters ar- 



300 CHAPTERS ON MONEY 

ranged so that banks will have the pozi'er to expand their 
note circulation when the need expands? We have still to 
consider the question, How can we insure that they shall 
have a disposition to do so? Here, of course, the general 
plan of procedure must be an appeal to self-interest. The 
banker is not carrying on business for health, or pleasure, 
or the public welfare, any more than is the butcher or the 
grocer. Like them he is primarily seeking his own advan- 
tage. The task of the legislator, in his case, as in the case 
of the butcher or the grocer, is so to regulate matters that 
he attains his own greatest advantage in supplying the best 
service to the public. 

Now, in a general way, our accomplishing this task 
chiefly means keeping our hands off, letting the banks alone. 
For the issuing of notes is naturally profitable, and ceases 
to be so only when the law imposes upon it such conditions 
that expenses (including taxes) eat up profits, or that some 
incidental disadvantage oft'sets profits. Issuing notes is 
naturally profitable, since it is a process whereby the bank 
borrows the money of indivduals without paying interest 
thereon ; for every man who has in his possession a ten 
dollar note issued by a bank is perforce a creditor of the 
bank for that sum. Of course, if the bank could make no 
use of the money thus borrowed, that is, if every time it put 
out a ten dollar note, ten dollars in other money came in, 
there would be nothing gained by the issue. But it is 
assumed that, in the case under consideration, the country 
needs more money, else we should not be wanting expan- 
sion ; and, if more money is needed, the bank can keep out 
in loans, both its notes and whatever other money comes 
into its possession. Manifestly, in such case, issuing the 
notes would naturally be profitable, being in substance an 
operation whereby the bank borrows money from one class 
of persons to whom it does not pay interest, and lends that 
money to another class of persons from whom it does receive 
interest. 



REGULATION OF BANK NOTES 3OI 

But, tliough the issue of notes is naturally profitable, 
this characteristic can easily be taken away by legislation. 
This has been the case much of the time with the national 
bank system of the United States. The computations in- 
volved in proving arithmetically that issue is, or is not, 
profitable are somewhat too complicated for our purposes. 
But decisive proof which every one can follow, is easily 
obtainable. Between 1881 and 1890 the note circulation 
fell ofif from $325,000,000 to $123,000,000, though during 
the same period the capital of national banks rose from 
$463,000,000 to $677,000,000. ^Manifestly the right to issue 
notes could not have been profitable during the time in 
question, else the banks would not, to so large an extent, 
have relinquished the exercise of that right. 

As to the explanation of this unprofitableness of issue, 
there are really two or three causes at work. First, the 
incidental expenses of issue are too large. The bank must 
deposit at Washington, Federal bonds equal in par value 
to the notes it wishes to issue. These bonds have been in 
the past at a premium ranging from six or eight to twenty 
dollars or more. As the premium will of course disappear 
by the date when the bonds are to be paid, — for the govern- 
ment will pay only what the face of the bond promises, — 
the bank must charge against the note issue the loss of this 
premium. Again, in buying the bonds, the bank invests 
its capital in a very low interest security; while, if it kept its 
capital in the form of cash, it might invest the credit based 
thereon in securities bearing a good rate, and to an amount 
perhaps twice as great as the value of both the bonds and 
notes. In addition, there are various small expenses con- 
nected with the technique of issue ; the cost of printing, 
express charges, exchange on funds sent to pay for re- 
deemed notes, interest on the cost of bonds from the pur- 
chase till the notes are on hand, a brokers' commission on 
the bond purchase, etc. These expenses are so considerable 
that a bank can scarcely afford to get out a new batch of 



o 



02 CHAPTERS ON MONEY 



notes, however great the need, unless those notes will stay 
out for some considerable time, so that the interest on them 
will run long enough to cover expenses. 

A second cause of the unprofitableness of issue is the 
tax laid on circulation. It used to be one per cent per 
annum ; it is now one-half per cent for most of the circula- 
tion. Whether or not justifiable on other grounds, this 
certainly works against elasticity. A third cause for the 
unprofitableness of issue which comes into operation at 
times of extraordinary need is to be found in the fact that 
the getting out of new notes diminishes somewhat the 
resources in lawful money and in general the cash imme- 
diately available to the bank ; and this fact, in periods such 
as we are speaking of. more than ofi^sets the earning of a 
little larger profit. Thus, in times of stringency, particularly if 
the public feeling is panicky, it may be all-important to the 
bank to maintain or increase its resources in lawful money, 
or at least in cash of some sort ; though, at the same time, 
the public advantage would be served, could the note issue 
be increased. Lkit, if the bank should try to get out one 
hundred thousand dollars in iicn' notes, in order to get the 
needed bonds it would have to part with, say, $110,000 in 
real iiionev or its legal equivalent, thus depleting its re- 
sources in legal money by $110,000, and diminishing even 
its total cash holdings, including notes, by $10,000.* Of 
course, this difficulty would not arise, if the bank already 
had on hand an extra stock of Federal bonds ; but this is 
not likely to be the case, since these bonds bear a very low 
rate of interest, and, consequently, are not a suitable invest- 
ment for banks. 



*Tt is not correct, however, to say that tliis operation would 
contract rather than expand the total circulation. The money wdiich 
the ]iank pays for the bonds does not cease to circulate, being passed 
on to other banks or to some owner of bonds, and, consequently, 
the new notes issued are a net gain to the total stock of currency. 
The only trouble is that the advantage of the general public does 
not at this point express itself in some advantage to the banker other 
than his indirect interest in allaying or guarding against panic. See, 
liowever, page 314. 



REGULATION OF BANK NOTES 303 

Precisely what course should be pursued to remedy these 
difficulties, is still a matter of controversy. Probably most 
specialists would agree that the tax on circulation should 
be given up altogether, antl that the conditions of issue 
should be made less onerous, either by permitting the issue 
of notes on the credit or ordinary assets of the banks, or 
at least allowing them to furnish as security to the Federal 
treasury which guarantees their notes, assets other than 
Federal bonds. It seems probable that in time some issue 
on ordinary assets will be permitted, though up to date 
proposals to this effect have not succeeded in gaining legis- 
lative approval. 

2 Contractility. 

We have seen what methods are applicable in ordinary 
times, to secure that the bank circulation shall expand to 
satisfy an increased need. We must now consider how 
that same circulation may be made to contract, in order to 
adjust itself to diminished need. Generally speaking, con- 
traction is efifected whenever notes pass into some condition 
where their further employment, as a medium of exchange, 
is rendered temporarily or permanently impossible. In such 
case, they may be described as temporarily or permanently 
retired. Now, this result may be brought about in any one 
of several ways. Manifestly, notes are retired in the fullest 
sense when they are withdrawn, and actually destroyed. 
Again, in our system, they should be looked on as fully 
retired when the issuing bank, having decided to give up 
the issue of its notes, deposits with the Comptroller of the 
Currency an amount of lawful money sufficient to redeem 
them, and withdraws its deposit of bonds, is so far as this 
is permitted by law. Retirement, in both these cases, should 
be called final. But there is another sort of retirement and, 
so, another sort of contraction, which is only temporary and 
yet, from our present standpoint, is much more important 
than those kinds already explained. Notes may be put into 



304 CHAPTERS ON MONEY 

a condition such that their further use as money is tempo- 
rarily exckided, simply by being returned to the issuing 
bank, provided the circumstances are just right. In such 
case, the notes have been temporarily retired, and the cir- 
culation is temporarily contracted. This principle is of 
such importance that we must take pains to get a clear 
apprehension of it. 

The conditions requisite to make receipt by the issuing 
bank, in effect, a retirement of a note, — a placing of that 
note where its reissue is, for the time being, rendered im- 
possible, — are two. ( i ) The notes must not be needed to 
do the money work of the country and (2) the notes them- 
selves should have good "homing" capacity, that is, the 
capacity, when not needed for money work, promptly to 
return to the issuing bank for deposit or redemption. Under 
these conditions, notes which have come intO' the possession 
of the issuing bank are practically retired. First, it is self- 
evident that they can not be treated as a part of the stock 
of money outside the bank ; since they are not there, and, by 
hypothesis, if again paid out, can not be kept there. But 
it is also certain that they can not be treated as money 
resources ivithin the bank. The bank is not a dollar better 
off by virtue of having them on hand. It can do nothing 
by their aid which it could not do without them. Its avail- 
able funds are no greater than they would be, if it did not 
have the power of issue. 

To make this clear, let us suppose that a bank has on 
hand $50,000 in its own notes and circumstances are such 
that no amount of effort will get and keep them out, and 
that, under these conditions, the bank wishes to make a 
loan of $10,000. Can this loan be made out of the fifty 
thousand dollars of notes ? In form yes ; in reality, no. By 
hypothesis, if the notes are paid out, these same notes, or 
others in equal amount, will immediately come in. But 
their coming in will be either for redemption or deposit or 
in pavment of a debt. And whichever it be, the result will 



REGULATION OF" BANK NOTES 305 

show that the $10,000 lent was really lent from some re- 
source other than the stock of notes. If the notes come in 
for redemption in lawful money, then the loan was really 
made with that money, and might just as well have been 
so made in the first place. If the incoming notes are depos- 
ited and so increase by that amount the volume of deposits, 
then the $10,000 loan was really made with deposit credit, 
not with notes. Finally, if the notes come in to pay a debt 
to the bank, then the loan of $10,000 was really made not 
with the notes, but with the proceeds of a debt owed to the 
bank. For, if no notes had been issued, the debtor to the 
bank would have paid his debt in lawful money which 
money in turn the bank could have used to pay its debt or 
to make good the reserve from which it had already paid 
the debt. Manifestly, then, under the circumstances sup- 
posed, the bank was not richer or better off by one dollar 
because of having in stock fifty thousand in its own notes. 
To the bank, therefore, those notes were not money. Their 
return to the bank had in effect retired them. 

I have explained that a bank can not really utilize its 
own notes when they will not remain in circulation, that, 
under such conditions, they form no part of its funds. 
I ought, perhaps, to add that a prudent bank will not even 
try to utilize its notes under these circumstances. The 
reason is, that every use of notes at such a time tends to 
weaken the position of the bank. For it is always likely that 
their coming in will be by way of presentation for redemp- 
tion in lawful money, in which case the reserve will be cor- 
respondingly depleted. Accordingly, a wise manager will 
be very slow in forcing out his notes when their frequent 
return shows that the room for notes is already taken up. 

It is now clear that the temporary retirement of notes 
is effected by their segregation in the vaults of the issuing 
bank, provided the needs of business are supplied and the 
notes have good homing power. Thus, we have two meth- 



306 CHAPTERS ON MONEY 

ods of contracting the circulation, filial retirement by de- 
struction or deposit with the Comptroller, and temporary 
retirement by segregation in the issuing bank. What, now, 
are the provisions needful to make these processes avail- 
able? I will take first the case of final retirement, though 
this method is probably the less desirable. 

To facilitate the effecting of contraction, through final 
retiremeijt, three things chiefly are wanted, (i) the legal 
right freely to retire notes, (2) a motive to induce the 
banker to retire his notes, and (3) convenient technical 
processes for carrying out his wishes. At the first point, 
our system is quite defective ; since our law openly puts 
a restraint on retirement, by limiting the total withdrawals 
on the part of all banks in the system to three millions dur- 
mg any one month. Until 1900, it even went so far as to 
punish the retiring of notes by prohibiting reissue for a 
period of six months after retirement. All such restrictions 
on retirement are of course indefensible. 

As respects providing the needed motive to induce 
bankers to undertake retirement, a natural method is to 
attach to the keeping out of the notes some expense ivhich 
the bank gets rid of by retiring those notes. Thus, in our 
system, there is a tax on the total taken from the Comptrol- 
ler, which the bank can escape only by final retirement. 
Again, the requiring of a deposit of bonds which are at a 
premium and bear only a low rate of interest makes banks 
anxious to withdraw notes when they can not be utilized. 
All these devices, however, are objectionable in that they 
work against expansibility. If the processes of issue are 
costly enough to cause bankers to contract when the need 
falls off, they are apt to hinder the prompt expansion of 
issues when need expands. As regards suitable technical 
conditions for enabling a bank to effect contraction when it 
has decided to do so, we are well provided. Thus, the 
Treasury will undertake to dispose of the bonds, if desired. 
Again, the provision that the bank may rid itself of all 



REGULATION OI^ HANK NOTES 307 

responsibility for any i)ortion o£ its notes by depositing in 
tbe Treasur\- an anionnt of lawful nioncv sufficient to re- 
deem those notes, enables it to effect an iiistaiitaiicoits coii- 
fracfioii of the total monetary stock, though the contraction 
of the actual note circulation comes about more slowlv. 

But probably all specialists would ag^ree that, in pro- 
viding- for the contractility of the circulation, it is better 
to rely not on some process of final retirement but on 
temporary retirement through the segregation of notes 
which are not needed, in the hands of the issuing bank. 
For any plan which depends on the self-interest of the 
banker for botli expansion and contraction, is in some dan- 
ger of failing at both points. If. in order to induce the 
banker to contract his issues, a high tax is imposed, or. in 
some other way. issue is made expensive, at the same time 
the profitableness of issue is taken away, and. so. expansi- 
bility is destroyed. The plan of segregation, in contrast 
with the above, depends for its working on the self-interest 
of persons outside the bank. Consequently, by resorting to 
the segregation plan, we commit the providing of con- 
tractility to the self-interest of one set of persons, — persons 
other than the issuing bank, — while we commit the provid- 
ing of expansibility to the self-interest of another set. — the 
issuing banks themselves. 

Let us see. then, how we can secure the conditions which 
will bring about the segregation of notes when the need 
for them falls off. We have already learned that this nat- 
urally takes place, provided the notes have good homing 
power. To secure good homing power in the notes, then, 
is the task of the legislator. Here two things are needed, 
( I ) adecpiate motive to induce holders to send notes home, 
and (2) proper machinery for effecting their purposes 
easily and quickly. As respects motives, two can be ap- 
pealed to in this connection, (a) the desire to get rival 
notes out of circulation in order to make room for one's 
own, and (b) tlie desire to get, in exchange for the notes, 



3o8 CHAPTERS ON MONEY 

money which will do work for which the notes are not 
qualified. To make bankers anxious to send home the 
notes of other banks, in order to make room for their own, 
we need to make the rijj^ht of issue more profitable than at 
present. In fact, most bankers look on the right of issue 
as of so little value that they make no efifort to get rid of 
other people's notes, on fliis occoiiiit. It is generally held 
bv experts that we can never have great improvement at 
this point, till we make issue really profitable, by removing 
the requirement that securities be deposited, and allowing 
the issue of credit notes. 

The second motive — the desire to get in exchange for 
the notes, money which will do work for which the notes are 
not qualified. — can be appealed to in a variety of ways. 
Any provision which makes the notes less desirable than 
other forms of money, acts in this direction. First, we may 
mention restriction of legal tender, as the most potent fac- 
tor in our own system. National bank notes are not receiv- 
able for customs duties. In consequence, it is said, the 
banks of New York City usually are quite prompt in pre- 
senting them for redemption at the subtreasury. Evidently 
every enhancement of legal tender works against contrac- 
tion, every limitation of tender in favor of contraction. A 
second means for inducing noteholders to demand redemp- 
tion is to prohibit the use of notes for bank reserves. This 
is the case with us as respects the national banks, and ob- 
viously tends in some measure to cause every national bank 
to hurry in the notes of other banks.* Unfortunately, this 



* Our system, however, shows a slight inconsistency at this 
point, on account of a decision of the Comptroller which in effect 
nullifies partially the statutory provisions. While a national bank 
can not count the notes of other banks as part of its lawful money 
reserve, it is permitted to deduct the amount of its holdings of such 
notes from its total deposits in computing the amount of reserve 
needed. Thus, if it were located in a reserve city, and its deposits 
amounted to four millions, its required reserve would naturally be 
one-fourth of that sum or one million. But, if it held two hundred 



REGULATION OF HANK NOTES 309 

restriction on the use of bank notes does not apply to banks 
outside the national system. State bank inspectors, it is 
said, make no effort to discriminate among the different 
sorts of bills — accepting as good reserve money, bank notes 
as well as the regular legal tenders. This is probably one 
of the most serious obstacles to the prompt homing of the 
notes. If no bank could count notes as reserve, those notes 
would doubtless be sent in for redemption much oftener 
than now. 

A third method of increasing the homing capacity of 
notes, which is more or less employed and is often urged 
for the American system, is to limit the territory in which 
they are permitted to circulate. In Germany, no bank mav 
pay out notes issued by banks other than itself or the Im- 
perial Bank, save in the city where the issuing bank is sit- 
uated, or to its redemption agent. Before the Civil War, 
Massachusetts had a similar provision in its banking law. 
Obviously, this arrangement almost compels banks to send 
home notes for redemption ; since otherwise their funds to 
the amount of the notes are practically useless. Some pro- 
vision of this sort should be incorporated in our national 
bank law. 

We have just seen what are the methods which can be 
emplo}ed, to secure that some one shall have a motive for 
sending home the notes of any bank. We have yet to 
remark on the machinery which is needed to enable such 
person to carry out his wishes, in other words, the redemp- 
tion machinery. To encourage the sending home of notes, 
the processes for effecting redemption should be easily 



thousand dollars in notes of other banks, it could call its deposits 
three millions eight hundred thousand, thus making its required re- 
serve fifty thousand dollars less than would otherwise be the case. 
In effect this is allowing a reserve city bank to count as lawful re- 
serve one-fourth of its holdings of outside notes. The matter is 
not an important one, but manifestly it diminishes in some meas- 
ure the interest of a bank in sending home the notes of other banks. 



3IO CHAPTERS ON MONEY 

worked and inexpensive. It would be vmfair and foolish 
to prohibit state banks from using- the notes of national 
banks as reserve, if we did not furnish convenient means 
for enabling them to exchange such notes for lawful money. 
Now, facility in redemption requires first that there should 
be local redemption agencies distributed all over the coun- 
try, so that anyone who desires to do so can get rid of the 
notes wherever he may be. But, secondly, there needs to be 
set up, between these local agencies and the issuing bank, 
one or more sets of intermediate agencies where the local 
agencies can get the notes redeemed without direct applica- 
tion to the issuing bank. If the local agencies are banks, 
and this seems very desirable, there should be two other 
sets of agencies, (a) one which includes an agency in each 
reserve citv to effect an exchange of bank notes and a 
mutual settlement of claims between the different local 
agencies, and (b) a single central agency located at the 
banking center of the country to effect an exchange of 
notes and a mutual settlement of claims between the reserve 
city agencies. 

If, now, we examine the national bank system of the 
United States, we find the conditions just described only 
rather imperfectly realized. In a way, local redemption 
agencies are provided everywhere that a national bank is 
located, in that each bank must accept as legal tender the 
notes of every other bank. Again, reserve city redemption 
agencies are in a measure provided for, in the fact that 
banks in such cities which keep reserves for outside banks 
do not hesitate to accept bank notes from their correspond- 
ents as lawful money. Finally, though the Treasury at 
Washington is officially the redemption agency for bank 
notes, yet in fact there is a central redemption agency in 
the banking center. New York City, in that the sub-treasury 
in that city makes a practice of redeeming all notes offered.* 



*As remarked on page 278, the authorities disagree as to the 
fact at this point. The statement in the text is my understandmg 
of the matter. 



REGULATION OF BANK NOTES 31I 

lUit, thoUL^h our system seems to have in a sense the differ- 
ent parts of a good redemption mechanism ; it is not, after 
all, quite adequate. 

First we ought to make every national bank a local 
redemption agent in the fullest sense, by requiring it not 
merely to accept, but also to redeem, the notes of other 
banks. This would probably diminish the extent to which 
state banks use notes for reserves. At present, if such a 
bank wishes to exchange holdings of l)ank notes, it must 
send them for redemption to the issuing bank or to a sub- 
treasurv. It ought to be able to effect such exchange at 
the nearest national bank. Of course it can, if opportunity 
arises, use these notes in making payments to neighboring 
national banks, as also to its correspondents in reserve 
cities. 1 )Ut op])ortunities of this sort may be lacking ; and 
ease of redemption should be absolutely assured. A second 
improvement which we ought to effect is providing for real 
reserve city redemption agencies. That is, a bank ought 
to be able to get rid of notes, not merely when it has occa- 
sion to send funds to its reserve city correspondent, l)ut under 
all circumstances. It should be able to get lawful money 
for the notes at the nearest reserve city, even when it has 
no occasion to send funds there. However, it is probable 
that were the motives for sending notes home sufficient, 
we should have no great trouble for lack of adec[uate 
machinery. 

B. Bnicrgeiicy Elasticity. 

Thus far, in considering how to provide for elasticity 
in the bank note circulation, we have had in mind what we 
asrreed to call ordinarv elasticitv, — the sort of elasticitv 
which is needed to adjust the money stock to the changes 
in need characteristic of ordinary times. But it is believed 
bv manv to be very desirable that there should also be, in 
the note circulation, a constituent which possesses Emer- 
gencv elasticity, — that is, the capacity to expand or contract 



312 CHAPTERS ON MONEY 

in the fashion that is necessary to meet those extraordinary 
changes in need which characterize a commercial crisis and 
the business depression which follows such a catastrophe. 

As respects the methods by which this emergency elas- 
ticity can be secured, much that has been said under ordi- 
nary elasticity applies. But some changes in procedure are 
called for, to meet differences in the conditions present. 
To secure prompt expansion, there is, of course, the same 
necessity that banks shall have, at their disposal, notes to 
meet the increase in need. Further, the greater importance 
of the interests at stake justify more vigorous measures to 
secure this condition of things. One device directed to this 
end which is quite common in emergency issue schemes, is 
to tax these issues so heavily that they are certain not to be 
used in ordinary time, and, hence, are certain to be ready 
for use when the real crisis comes. When the power of 
issue is unlimited, there is little or no need of any expedient 
of this sort. 

Another requisite of expansibility which needs careful 
looking after, in an emergency circulation even more than 
in the ordinary issues, is that the bank shall be in condition 
promptly to utilize its power of issue, whenever the emer- 
gency arises. Now, this almost necessarily involves, either 
(i) that the law shall allow the banks to issue notes based 
on credit simply, or (2) that, if collateral security is re- 
quired, we shall admit for this purpose such assets as banks 
are certain at all times to have in their possession. For, 
obviously, a bank can not promptly expand its issues, if it 
must first go on the market and buy a special class of secur- 
ities such as United States bonds. Of these two alterna- 
tives, most projects for furnishing an emergency circulation 
choose the former, i. e., they propose to base such issues 
on credit or general assets with a safety fund and without 
collateral security. This plan would fully meet the need 
for availability and promptness; since a bank desiring to 
expand its issues one hundred thousand dollars could easily 



REGULATION OF BANK NOTES 313 

put into the Federal treasury the money needed for the 
safety fund, $5,000. 

But it is always possible that a public accustomed only 
to notes guaranteed by the government, will not consent 
to the issue of pure credit notes, — will insist on either a 
good guarantee or collateral security in the custody of some 
institution other than the issuing bank. In that case, one 
of the most promising pjans for providing an emergency 
circulation is to authorize the issue of notes which shall 
be guaranteed by the Clearing House Associations, these 
associations to be secured by collateral made up of ordinary 
bank assets deposited with them. Plainly, this would reduce 
the delay incident to getting out new notes to a minimum. 
For, since every solvent bank would be sure to have the 
requisite collateral, no time would be lost getting hold of 
this ; and since the Clearing House and the bank are in the 
same city within easy reach of each other, the processes of 
issue could be gone through in the least possible time. 

The scheme of a Clearing House emergency circulation 
would be a natural development of a practice which has 
been in vogue in the United States for more than forty 
years, i. e., issuing, in time of panic. Clearing House loan 
certificates which furnish a settling currency between the 
members of the Association and which, in effect, combine, 
for the time being, the reserves of all. To get these cer- 
tificates, a bank must deposit with a Committee from the 
Clearing House its own note of hand to cover the amount 
desired, together with collateral securities approved by the 
Committee. The value of the certificates can not be more 
than three-fourths of the value of the securities deposited, 
thus allowing some shrinkage. The banks are all jointly 
responsible, thus increasing the security. Each bank has 
to pay interest, usually at six per cent, on its note, so that 
retirement is certain to be effected as soon as possible.. 
Thus, in some important particulars, these certificates them- 
selves have the characteristics of an emergency issue. They 



314 CHAPTERS ON MONEY 

do not, however, circulate outside the banks, and, hence, do 
not meet directly the needs of the outside public ; though 
indirectly they, in a measure, accomplish this result, since 
their use by the banks releases to some extent other funds 
which they replace. It is rather surprising that this idea 
has not been developed so as to provide a real emergency 
circulation. It certainly promises well. lUit it has not 
gained popular approval ; and there seems to be little prob- 
ability that any plan involving this principle will be worked 
out. 

If we insist on requiring from the banks the deposit of 
bond securities, the only remaining method of procedure 
giving any promise of relief is to admit the use of bonds 
which banks are likely to have, i. e., the bonds of states, 
municipalities, railways, etc. To require securities of this 
class would not materially interfere with prompt expansion ; 
for the larger banks are likely to have a considerable stock 
of such securities. This is due to the fact that, while it is 
the luisiness of banks largely to invest their funds in ordin- 
ary business paper, — the notes and bills of dealers, — yet 
prudent banking requires in addition a moderate stock of 
assets which can be surely and quickly turned into cash to 
meet sudden demands, a requirement which is met by keep- 
ing on hand a considerable stock of first-rate bonds. 

When it comes to the second general condition of 
expansibility, that bank shall be disposed to use their power 
of issue, the emergency circulation presents a problem some- 
what dififerent from that of the ordinary circulation. In 
the case of ordinary issue, it is necessary to make the oper- 
ation directly profitable. This is not the case with the 
emergency issue. On the eve, or in the midst, of a crisis, 
banks do not nicely consider questions of profit. They are 
ready even to pay a price for the privilege of using any 
expedient which holds out hope of escape from universal 
bankruptcy. But, while the issuing of an emergency cir- 



REGULATION OP BANK NOTES 315 

culation need not l)e protilahle in the ordinary sense, if must 
be ivorfh while as accoiiiplisliiiii:; the work which the bank 
wants done, that is, increasing the bank's resources in what 
the imbHc will accept as cash. And this is just where the 
plan of requiring- government bonds as collateral security 
breaks down. Unless banks already have on hand a stock 
of such bonds, or are so situated that they can borrozv such 
bonds, their resources in what the public treats as money 
■will be diminished rather than increased by the getting out 
of notes. For, in such case, they must go on the market 
and buy these securities, putting into them $105,000 to 
$110,000 of money for every $100,000 of notes they get out. 
Nor is this actual loss in nominal money the worst of the 
matter. The $100,000 gained at a cost of. say, $107,000 is 
only a sort of money, a money good for certain purposes 
only ; while the money which is paid out as a condition of 
getting the poor sort, is real legal tender money, able to 
serve as reserve and, in general, to do all the work of 
money. 

It, thus, seems substantially impossible to provide an 
adequate emergency circulation, so long as we require the 
deposit of Federal bonds. Among alternative schemes, any 
one of several would answer fairly well, (i) Requiring a 
deposit of some other high class bond would meet the case 
for the reason, given a few pages back, that banks usually 
carry a moderate stock of such investments and, therefore, 
would lose nothing in money in getting out the new notes. 
(2) The plan of allowing the keeper of the securities, say 
the Clearing House Association, to accept ordinary assets 
would work perfectly ; since banks of course have an ample 
stock of these. (3) Equally satisfactory would be the plan 
of permitting credit issue with no other security than a 
small safety fund and joint bank guarantee. On this plan, 
the bank would have to part with a small fund of cash, but 
would get in return notes to many times the amount sacri- 
ficed. 



3l6 CHAPTERS ON MONEY 

I have considered the emergency circulation, on the side 
of expansibihty only. But all agree that promptness in 
contraction after the great need has passed is scarcely less 
important. For a monetary crisis is bound to be followed 
by a period when business is stagnant, a condition which 
makes the need for money small, which, in turn, is likely 
to lead to an outflow of gold and, so, to endanger the whole 
monetary system. The only sure way to prevent disaster is 
heroic contraction. As a matter of fact, this will probably 
require in the end contraction even in the ordinary circula- 
tion. But this is not so imperative, and, if the notes have 
good homing power, will not be long delayed. A consid- 
erable measure of contraction, however, should be effected 
at once. To accomplish this is easy enough. Our system 
already provides that banks can clear themselves of all 
responsibility for any portion of their notes by depositing 
in the Federal treasury an amount of lawful money equal 
to the amount of notes they wish to be rid of. If, to this 
be added a tax of 5 or 6 per cent on all emergency notes, 
the banks will surely provide for the retirement of these 
notes, or at least for an equal contraction of the total cir- 
culation, just as soon as the notes can be spared. Finally, 
if it is deemed important to hasten still more the retirement 
of the notes themselves, as distinguished from the segrega- 
tion of an equal amount of lawful money, this can be done 
by paying a premium for all notes presented for redemption 
prior to a certain date. 



UNIVERSITY OF CALIFORNIA AT LOS ANGELES 

THE UNIVERSITY LIBRARY 

This Ibook is DUE on the last date stamped below 



APR 8 



iQ 



42 



OCT 3 1951 * 



Form L-9 
20m-l,' 42(8519) 



AT 
LOS ANGELES 



KG 

221 

T21s 



UC SOUTHERN REGIONAL LIBRARY FACILITY 




AA 000 591 588 9 



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ii 





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